The People's Bank of China has ordered domestic rating agencies to rein in triple-A designations for corporate borrowers whose bonds carry yields far above government debt. Since April, the central bank has conducted on-site inspections targeting issuers with coupon spreads exceeding two percentage points over comparable sovereign yields, part of a broader push to curb ratings inflation that saw over 90% of newly rated bonds carry AAA labels as of August 2024 — up from less than half in 2016.

Lianhe Credit Rating has withdrawn ratings from several AAA issuers, including Xi'an Qujiang Cultural Financial Holdings and Tianjin Jinrong Investment Service Group, while rival Chengxin briefly posted then retracted a three-month suspension notice. Regulators are also scrutinizing whether agencies competed for clients by assigning overly generous grades.

Market participants warn the blunt, spread-based thresholds ignore duration, sector, and liquidity factors. The crackbook could push borrowers toward short-term debt to comply, increasing rollover risk. Since January, only about 1% of new bonds carried spreads above two percentage points, with 9% in the 1-2 point range.

The campaign reflects Beijing's determination to clean up credit assessment after the Evergrande collapse exposed systemic flaws. Yet analysts caution administrative orders alone won't normalize AAA ratios overnight, leaving insurance companies and smaller institutions vulnerable to misleading ratings.