Marlene Amstad, Zhiguo He, 16 July 2019

China’s corporate bond ratings are sharply skewed upward, which is partly explained by the large amounts of bonds by issuers who are mostly linked to the government. This column proposes credit spreads as an alternative, market-based measure of credit risk. It also argues that the main reason for the high credit ratings and low dispersion of credit spreads is the very short and limited history of defaults in China. The post-2014 sharp rise in corporate bond defaults is therefore essential for further market development, particularly because Chinese defaults remain low relative to global standards.

CEPR Policy Research