Are Credit Ratings Relevant in China’s Corporate Bond Market?

While China may imitate the United States in establishing and regulating its nascent credit rating industry, the reputation and influence of the rating agencies may take years to develop. This observation has led to suggestions that investors have largely discounted the opinions of Chinese credit rating agencies. Using post-2005 data, we find that credit spreads and bond ratings in China display a similar relation to that found in the United States. In particular, this relation remains significant after controlling for bond-level and firm-level characteristics. This suggests that investors indeed use credit ratings to determine the risk premiums on Chinese corporate bonds.