Author(s): Wei Tian, Xiangyun Zhou *, Yixiang Tian, Wei Meng
Ratings are important for the continuous development of the capital market. However, the phenomenon of rating inflation is obvious in Chinese corporate bonds. For default events in 2018, the ratings of default corporate bond were above AA. In fact, there are obvious differences between domestic ratings and foreign ratings. Most corporate bonds are rated AAA by DRAs (domestic rating agencies, DRAs) and given junk ratings by GRAs (global rating agencies, GRAs). Kou et al demonstrate that Chinese rating agencies have not acquired good market credibility; the quality of corporate bond ratings should be improved . Huang et al find that the more defaults occur, the more credit rating agencies (CRAs) easily provide inflated ratings . Therefore, it is of great importance to prevent inflated ratings and improve the rating quality of Chinese corporate bonds.
With the rapid opening up of the Chinese bond market, the Ministry of Finance of the People's Republic of China, China's Commerce Ministry and China's Foreign Ministry issued the Early Harvest of the One Hundred-Day Plan for China-USA Economic Cooperation on May 12th , 2017. This plan announced that the Chinese rating industry promised foreign rating agencies that it would provide rating services in China, and GRAs could apply for credit permits before July 16th , 2017. The establishment of S&P (China) symbolized that the Chinese rating industry widely opened up to the world on January 28th , 2019.
Researchers have reported some expectations about the open policy for the rating industry. Some results show that the Chinese rating industry may increase competition, which will lead to reduced rating demand for DRAs in the short term. Sun finds that the big three CRAs have entered the rating market of China, which has led to a large adjustment in ratings and capital fluctuation . Wang et al demonstrate that DRAs will lose considerable rating demand due to their poor credibility and low reputation in the fully open Chinese rating industry . Others find that inclusive development among rating industries can avoid a massive concentration of domestic ratings and can improve the credibility of rating information . Andre shows that Moody's will adjust rating information when the S&P changes ratings, which leads to rating convergence between Moody's and the S&P .
This study improves the Hotelling model and analyzes the competition among DRAs and GRAs from the short-term perspective and long-term perspective under the open policy of the rating industry. We utilize corporate bond data from the DRAs and GRAs to conduct empirical tests. Our research attempts to answer two question: First, can the open policy prevent rating inflation and improve rating quality? Second, can the open policy of the Chinese rating industry lead to rating convergence among the DRAs and GRAs?
In the remainder of the article, Section 2 provides a review of the relevant literature. Section 3 describes the construction of a new differential Hotelling model. In Section 4, we theoretically analyze the effect of the open policy...