Agencies wary of awarding higher ratings as the risk of default rises

BEIJING - Fewer Chinese companies were upgraded by domestic credit-rating agencies in October than in any other month this year as higher interest rates and slower economic growth hurt earnings and raised the risk of defaults.

The nation's four largest credit rating companies raised rankings on one borrower in October, compared with four in September and 10 in August, according to data compiled by Bloomberg and a report from the state-backed China Credit Rating Co. One company was downgraded in September, Bloomberg's data show. Standard & Poor's, which ranks debt sold outside China, cut ratings on seven Chinese issuers this year and raised two.

Earnings growth slowed at companies including Anhui Conch Cement Co and Aluminum Corp of China after the central bank raised interest rates three times in 2011 to curb inflation and economic growth eased to the weakest pace since 2009. Concern over default risk caused the difference in yields on the five-year notes of Chinese companies rated AAA. Meanwhile, similar-maturity A-rated debt has widened 89 basis points since Sept 30 to a record 417 on Wednesday, according to Chinabond data. The comparable gap for US debt narrowed 19 basis points to 135 in the same period, according to indexes from Bank of America Merrill Lynch.

"China's economy is slowing quite quickly and we've seen companies' earnings growth slowing," said Huang Jiliang, a bond analyst in Shanghai at Guotai Junan Securities Co, the nation's biggest brokerage by revenue, on Nov 1. "In China because there are so few downgrades you have to look at the upgrades."

Industrial companies' net income rose 27 percent from a year earlier to 3.68 trillion yuan ($579 billion) in the first nine months of 2011, after increasing 28.2 percent in the January to August period, according to the National Bureau of Statistics.

A government campaign to curb rising prices, together with slumping global demand for exports as Europe struggles to solve its debt crisis, is tempering economic growth. China's economy grew 9.1 percent in the third quarter from a year earlier, down from 9.5 percent in the previous three months.

Manufacturing expanded last month at the slowest pace since February 2009, according to data released this week by the China Federation of Logistics and Purchasing.

Last week, Premier Wen Jiabao said that economic policies will be "fine-tuned" as required and the industry ministry said it is studying "stimulative policies" for smaller companies. In Europe, leaders raced to prevent their debt crisis from escalating by withholding 8 billion euros ($11 billion) and warning that Greece will surrender all European aid if it votes against a bailout package agreed only last week.

In the US last month, New York-based Standard & Poors Financial Services LLC upgraded more companies than it downgraded. The ratings company awarded 50 more upgrades than downgrades, according to data compiled by Bloomberg.

That compares with 15 more upgrades than downgrades in the third quarter. Chinese credit-ratings companies raised ratings on 31 borrowers in the three months ending Sept 30, compared with 60 in the second quarter.

Chinese companies rated AA+ or above sold 13 percent of all domestic corporate bonds this year, down from a 30 percent share of new notes last year, according to Fan Wei, a Beijing-based fixed-income analyst at Hongyuan Securities Co.

Bloomberg News