Summary of Key Points
On the afternoon of June 29th, China Chengxin International issued a notice regarding the “Suspension of the Rating System,” which was subsequently removed that same night, sparking market speculation. However, this system is not a new policy but rather an enhancement of the company’s existing internal regulations. Its purpose is to standardize the process for rating bonds when insufficient information is available, in line with regulatory requirements and as part of the broader trend of removing inflated ratings from the credit bond market.
I. The Sudden Removal of the Announcement: Why Did the Market React?
The announcement was released on the afternoon of June 29th and removed the following evening, coinciding with the “mid-year rating renewal period”—the time when rating agencies conduct annual reviews of bond issuers. Given that there have been more cases of credit bond ratings being downgraded or canceled in the first half of this year (a signal of regulatory efforts to reduce inflated ratings), it is natural for the market to wonder if new rating policies were about to be introduced and whether they would affect the ratings of more bonds.
Industry insiders explain that the removal of the announcement was not due to any issues with the policy itself but rather because the details were not communicated clearly (for example, the wording might have led to misunderstanding it as a new policy, or internal procedures were not completed). Essentially, this was just a refinement of the company’s internal business practices, not a sudden change in policy.
II. What Exactly Does the “Suspension of Ratings” Mean?
In simple terms, if a rating agency does not have enough information to assess the credit risk of an issuer, it will temporarily suspend the rating process, and the existing rating will no longer be valid during this period.
There are two common scenarios that trigger a suspension:
1. Significant changes in the company but lack of relevant information: For instance, if the issuer’s business or financial situation has changed suddenly, but the rating agency does not have enough data to evaluate the risk, it may suspend the rating until more information is available (this period can be extended in special circumstances).
2. Delayed financial reports or unresolved issues: If the issuer delays releasing its financial statements or is involved in significant litigation or restructuring, making it difficult to assess the risk for the time being, the rating may also be suspended until the situation is resolved.
For example, if a company announces that its annual report will be released a month later than scheduled, the rating agency will suspend the rating until the new report is available, as it cannot use outdated information to assess the current risk.
III. It’s Not a New Policy—It’s Just an Enhancement
Many people thought this was a new initiative, but it isn’t. China Chengxin International had already published a “Tracking Rating Management System” in 2021, which included provisions for suspending ratings. The system was revised in September 2023 to clarify the procedures further. Examples of rating suspensions from previous years can be found on their official website (for example, regarding Shenzhen Zhuoyue Commercial Management Co., Ltd.).
The separate announcement this time was intended to highlight these suspension provisions, making the process more transparent and standardized. It’s essentially a reiteration of the existing rules, informing both the market and issuers that in cases of insufficient information, the new procedures will be followed.
IV. Regulators Have Long Been Calling for Standardized Ratings
Why is this system being reinforced now? Because regulatory authorities have long demanded that rating agencies do not issue ratings based on incomplete or misleading information:
- In August 2021, five departments, including the central bank and the National Development and Reform Commission, issued a statement requiring rating agencies to suspend or cancel ratings if issuers fail to cooperate in providing necessary information.
- In October 2023, the China Securities Association also emphasized the need to promptly suspend ratings when issuers do not cooperate.
The increase in downgraded credit bond ratings in the first half of this year reflects regulatory efforts to reduce inflated ratings. Previously, some rating agencies would issue high ratings regardless of the availability of information. By strengthening the suspension mechanism, China Chengxin International is complying with these regulations, ensuring that ratings are based on accurate information and avoiding misleading investors.
V. What Impact Will This Have on the Market?
In the short term, it may cause some less transparent issuers to feel more pressured, as their ratings could be suspended if they do not provide the required information, which could increase investor skepticism about these bonds. In the long run, this is a positive development: ratings will become more accurate, allowing investors to better assess risks and promoting a healthier credit bond market.
In other words, rating agencies will no longer issue high ratings without proper evaluation. If there is insufficient information, they will suspend the rating process, which protects investors.
In summary, the sudden removal of the announcement was a minor misunderstanding, but it reflects a broader trend in the credit bond market towards more accurate and transparent ratings. This is exactly what regulators and the market both desire.