Credit Rating Guidance for Short-term Financing Bonds

Preface

Succeeding the issuance of "Administrative Measures on Short-term Bonds Issued by Securities Companies" by Central Bank of China in October 2004, the issuance of "Administrative Measures on Short-term Financing Bonds" in May 2005 represented the thorough startup of short-term financing bond market in China.

The introduction of short-term financing bond in the inter-bank bond market is a big breakthrough to our domestic financing methods, playing significant strategic influence over expanding direct financing channels for enterprises, mitigating the proportion maladjustment of direct financing to indirect financing, facilitating the monetary policy transmission mechanism, preventing general monetary supply from excessive growth, promoting the harmonious development in both monetary market and capital market.

The framework of short-term bonds in China is designed to sufficiently demonstrate marketization. Concerning market admission, the record system of short-term financing bonds weakens the effect of administrative interference to make the market recognize issuers. Regarding issue approaches, marketization methods such as sales by proxy, exclusive sales, invitation to bids are adopted with issued interest rate determined by market competition to no control limitations. Besides, the short-term financing bonds can be issued without guaranty, beneficial to improve efficiency and reduce cost of financing.

Despite the availability of short-term financing bonds is an important opportunity to bond market participants, it also involves risks and challenges. Especially to investors, the enhancement of short-term financing bond marketization principles and admission for unsecured issue contain even greater risks to some extent, which objectively requires investors with quality risk information and superior risk distinguishing capabilities.

Not only does the credit rating provide investors with impartial and independent opinions to help effectively solve the asymmetry problem of credit information between investors and investees, but also the result of which is key reference for risk pricing in the condition of interest rate marketization.

Credit rating plays a significant role in bond market operation, however, only quality credit rating reports can benefit the favorable development in bond market, and offer investors valuable reference in decision making and risk pricing. This requires the credit rating agencies should establish scientific rating methods, proper rating standards and integrated operation flow in accordance with the essential requirements of credit rating to ensure the quality of rating report.