fundsWe use the transaction data and rating changes from Bankscope, WIND and China Chengxin International Credit Rating Co., Ltd. (CCXI). CCXI was licensed by the People’s Bank of China and the Ministry of Commerce in 1987 and is the first Sino-foreign joint venture which was set up in 2006 between Moody’s and its parent company, with Moody’s holding 49% stake in CCXI and having an option to increase its ownership over time as permitted by Chinese authorities.

Table 1 reports the name and ticker of 23 Chinese commercial banks who issued subordinated bonds between 2006 and 2011. This table also shows the total assets of these banks by the end of 2011 and relevant country rank and world rank based on their total assets. Affected by the huge credit scale, the capital adequacy ratios of all Chinese banks declined sharply in the past few years. The capital adequacy ratios in some banks were even lower than 8 percent before 2009. Under heavy pressure, all banks, especially medium- and small- size banks had to attempt all means to raise capital. They showed special interest in subordinated bonds although it is not the only way to raise funds. To raise your funds is rather easy with Speedy Payday Loans and website – speedy-payday-loans.com suggested such a service as approving credits online.

We use WIND to identify rating changes by the CCXI, Lianhe and Dagong between 2006 and 2011. We are able to obtain the ratings history and necessary bond characteristics data (e.g. maturity, coupon rate, etc.) from WIND. At the issue level, the imposition of these screens results in a preliminary sample of 41 bond rating changes (2 downgrades and 39 upgrades). However, trading activity around rating changes illustrates the illiquidity of the subordinated bond market in China. 19 issue level observations mentioned above trade on fewer than fourteen days during the 201 market days centered around Day 0 (Day -100 to +100), where Day 0 is the rating change data, or do not trade at all. To deal with this illiquidity, we impose trading restrictions. For all our analyses of daily spread, we require a bond to trade on at least 10 days during Day -30 to +30. This screen is similar to the one employed by Bessembinder et al.. Table 2 reports the preliminary sample of 41 bond rating changes. Table 3 reports the screened sample of 22 bond rating changes.

We compute daily raw returns on individual bond issues following Bessembinder et al. and May :

7548-26987-1-PB-1

Where Pt and Pt-1 are the daily prices on days t and t -1, respectively, and AIt is the interest accrued over day t. The accrued interest on day t is computed as the annual coupon payment multiplied by L, all divided by 360, where L is the number of calendar days elapsed between the close of day t _ 1 and day t. If the bond is not traded on day t, Pt is set equal to the most recent observed daily price.

Where on day t, BSt is the spread of subordinated bonds, R is the raw bond return, and BRt is the yield to maturity of the government bond.

 Subordinated bondTable 4 reports the bond spreads for the full samples of downgrades and upgrades. It suggests that downgrade has a significant effect on bond spread though there was only one downgrade case. The downgraded bank experiences a huge increase on the bond spread in both the event windows (-1, +1) and (-30, +30). Holthausen and Leftwich and Goh and Ederington document a similar result on the abnormal bond returns for the common stock of downgraded firms. However, the bond spread of upgraded subordinated bonds either increases or decreases in both event windows. This evidence suggests that the information conveyed by an upgrade may not be fully incorporated into bond spread.

We then compute the daily bond spread as the raw return minus the bench market rate:

7548-26987-1-PB-2

For each event window, we report a t-statistic based on the cross-sectional standard error of bond spreads to examine whether the median bond spread differs from zero. The results in Table 5 suggest that both upgrades and downgrades of the subordinated bonds in China do not have a significant effect on bond spread. This result is not consistent with May, who studies the information content of bond rating changes using daily corporate bond data in the U.S. market. May ’s empirical results show that the abnormal bond returns over a two-day event window that includes the downgrade (upgrade) are negative (positive) and statistically significant. We conjecture that the insignificant statistical results regarding the effect of rating changes may be due to the lack of informational content of the ratings assigned to the subordinated bonds by Chinese CRAs.

Lee argues that China’s debt securities markets are being impeded by the lack of high quality independent credit-rating services. He claims that major Chinese credit-rating agencies have put too much emphasis on winning business by giving top ratings to most issuers, whether top ratings were deserved or not. Kennedy also suggests that these domestic rating agencies have no apparent impact on the decisions of corporate bond buyers in China and the market attaches little credibility to their ratings. We agree that there are many questions on the value of China’s credit ratings to investors, despite the urgent need for high quality credit ratings in the emerging Chinese financial markets. The problems and prospects of China’s credit rating industry development are discussed in the following section.

Table 1. Chinese banks who issue the subordinated bonds with rating changes

Bank Name Ticker Country Rank by Assets World Rank by Assets Total Assets (million USD)
China Merchants Bank CMB 9 86 362,758
Shanghai Pudong Development Bank SPDB 10 92 330,884
China CITIC Bank CITICB 11 100 314,260
Industrial Bank IB 12 112 279,284
China Everbright Bank CEB 14 129 223,457
Hua Xia Bank HXB 15 164 157,081
China Guangfa Bank GFB 16 195 122,966
Bank of Beijing BJB 17 208 110,708
Shenzhen Development Bank SDB 18 209 109,863
Bank of Shanghai SHB 19 251 85,578
Bank of Jiangsu JSB 20 310 64,995
Evergrowing Bank EB 23 474 41,389
Bank of Ningbo NBB 25 489 39,752
Shanghai Rural Commercial Bank SRCB 27 512 37,949
Bank of Nanjing NJB 28 552 33,443
Bank of Hangzhou HZB 29 559 32,830
China Zheshang Bank CZB 30 560 32,812
Bank of Dalian DLB 35 674 26,085
Harbin Bank HRB 42 829 19,902
Shengjing Bank SJB 45 893 16,604
Bank of Dongguan DGB 47 914 16,256
Bank of Zhengzhou ZZB 91 2110 4,160
Bank of Deyang DYB 110 3273 1,841

Table 2. Preliminary sample of 41 rating changes

Bond Latest rating announcement date Latest

rating

Adjust

ment

Previous rating announcement Date Previous

rating

05NJB01 2011/7/27 AA Up 2010/7/28 AA-
06CMBC01 2007/7/30 AA Down 2006/7/28 AAA
06CMBC01 2008/7/24 AA+ Up 2007/7/30 AA
06CITICB01 2010/7/27 AAA Up 2009/11/10 AA+
06CITICB02 2010/7/27 AAA Up 2009/11/10 AA+
06CZB 2011/6/26 AA- Up 2010/7/20 A+
06CZB 2007/7/31 A+ Down 2006/4/30 AA-
06CZB 2008/1/15 A Up 2007/7/27 A-
06CZB 2009/4/22 A+ Up 2008/6/26 A
06CZB 2010/11/17 AA- Up 2010/7/27 A+
06CZB 2011/7/15 AA Up 2010/11/17 AA-
06IB02.FX 2010/3/30 AA Up 2009/11/4 AA-
06IB02.FL 2010/3/30 AA Up 2009/11/4 AA-
06HZB01 2011/7/27 AA Up 2010/7/28 AA-
07HXB01.FX 2010/3/30 AA Up 2009/11/4 AA-
07HXB01.FL 2010/3/30 AA Up 2009/11/4 AA-
07DGB01 2012/7/16 AA- Up 2011/6/13 A+
07SPDB02 2010/6/25 AA+ Up 2009/7/21 AA
07SPDB01 2010/6/25 AA+ Up 2009/7/21 AA
08SDB.FX 2011/7/26 AA+ Up 2010/7/1 AA
08SDB.FL 2011/7/26 AA+ Up 2010/7/1 AA
08SDB02 2011/7/26 AA+ Up 2010/7/1 AA
08CEB01.FX 2008/10/13 AA+ Up 2008/4/9 AA
08CEB.FL 2008/10/13 AA+ Up 2008/4/9 AA
08CEB02.FX 2008/10/13 AA+ Up 2008/4/9 AA
08GFB.FL 2010/7/29 AA+ Up 2009/7/17 AA
08GFB01.FX 2010/7/29 AA+ Up 2009/7/17 AA
08GFB02.FX 2010/7/29 AA+ Up 2009/7/17 AA
08JSB01 2011/6/17 AA Up 2010/7/29 AA-
08JSB02 2011/6/17 AA Up 2010/7/29 AA-
08BJB01 2010/7/15 AAA Up 2009/7/20 AA+
08BJB01 2009/7/20 AA+ Up 2008/7/2 AA
08BJB02 2009/7/20 AA+ Up 2008/7/2 AA
08BJB02 2010/7/15 AAA Up 2009/7/20 AA+
08SJB 2009/8/20 A+ Up 2008/7/24 A
08SJB 2012/7/24 AA- Up 2011/7/29 A+
08HZB 2011/7/27 AA Up 2010/7/28 AA-
09EB 2012/7/12 AA Up 2011/5/23 AA-
09SDB01 2011/4/6 AA Up 2010/10/29 AA-
09CZB 2011/7/15 AA Up 2010/11/17 AA-
09CZB 2010/11/17 AA- Up 2010/7/27 A+
09NBB 2011/7/27 AA+ Up 2010/7/29 AA
09DYB 2012/6/26 A- Up 2011/7/28 BBB+
09JSB 2011/6/17 AA Up 2010/7/29 AA-
09SHB01 2012/7/10 AAA Up 2011/7/5 AA+
09SHB02 2012/7/10 AAA Up 2011/7/5 AA+
09SRCB 2010/5/28 AA- Up 2009/4/27 A+
09SRCB 2012/6/27 AA Up 2011/6/13 AA-
09HRB 2012/7/27 AA Up 2011/7/27 AA-
09HRB 2011/7/27 AA- Up 2010/7/29 A+
09DLB 2011/4/29 AA- Up 2010/7/23 A+
09ZZB 2012/4/27 AA- Up 2011/7/18 A

Table 3. Screened sample of 21 rating changes

Bond Latest rating announcement date Latest

rating

Adjust

ment

Previous rating announcement Date Previous

rating

05NJB01 2011/7/27 AA Up 2010/7/28 AA-
06CMBC01 2007/7/30 AA Down 2006/7/28 AAA
06CMBC01 2008/7/24 AA+ Up 2007/7/30 AA
07HXB01.FL 2010/3/30 AA Up 2009/11/4 AA-
08SDB.FX 2011/7/26 AA+ Up 2010/7/1 AA
08SDB.FL 2011/7/26 AA+ Up 2010/7/1 AA
08CEB01.FX 2008/10/13 AA+ Up 2008/4/9 AA
08GFB01.FX 2010/7/29 AA+ Up 2009/7/17 AA
08GFB02.FX 2010/7/29 AA+ Up 2009/7/17 AA
08BJB01 2009/7/20 AA+ Up 2008/7/2 AA
08BJB02 2009/7/20 AA+ Up 2008/7/2 AA
08BJB02 2010/7/15 AAA Up 2009/7/20 AA+
08SJB 2012/7/24 AA- Up 2011/7/29 A+
08HZB 2011/7/27 AA Up 2010/7/28 AA-
09CZB 2011/7/15 AA Up 2010/11/17 AA-
09CZB 2010/11/17 AA- Up 2010/7/27 A+
09NBB 2011/7/27 AA+ Up 2010/7/29 AA
09SRCB 2010/5/28 AA- Up 2009/4/27 A+
09SRCB 2012/6/27 AA Up 2011/6/13 AA-
09HRB 2012/7/27 AA Up 2011/7/27 AA-
09HRB 2011/7/27 AA- Up 2010/7/29 A+
09DLB 2011/4/29 AA- Up 2010/7/23 A+
09ZZB 2012/4/27 AA- Up 2011/7/18 A

Table 4. Empirical results on bond spread reaction

Bond Latest rating announcement date Adjustm

ent

Trading before/after the event window (-1,+1) Bond spread before/after the event window (-1,+1) (%) Trading before/after the event window (-30,+30) Bond spread before/after the event window (-30,+30) (%)
05NJB01 2011-07-27 Up No -0.25 Yes -0.31
06CMBC01 2008-07-24 Up Yes 0.11 Yes -0.17
06CMBC01 2007-07-30 Down No 1.99 Yes 1.42
07HXB01.FL 2010-03-30 Up No 0.00 No 0.21
08SDB.FX 2011-07-26 Up Yes 0.16 Yes 0.19
08SDB.FL 2011-07-26 Up No 1.07 No 1.07
08CEB01.FX 2008-10-13 Up No 0.40 No 0.40
08GFB01.FX 2010-07-29 Up No 0.02 Yes 0.20
08GFB02.FX 2010-07-29 Up Yes 0.15 Yes 0.24
08BJB01 2009-07-20 Up No 0.17 Yes -0.80
08BJB02 2010-07-15 Up No 0.59 Yes 0.51
08BJB02 2010-07-15 Up No -0.64 Yes -0.05
08SJB 2009-08-20 Up No 0.48 Yes -0.16
08HZB 2011-07-27 Up No 0.16 Yes 0.32
09CZB 2011-07-15 Up No -0.37 No -0.32
09CZB 2010-11-17 Up No -0.43 No -0.43
09NBB 2011-07-27 Up No 0.39 Yes 3.33
09HRB 2011-07-27 Up No 0.04 Yes 0.04
09DLB 2011-04-29 Up No -0.30 No -0.30
09ZZB 2012-04-27 Up No -0.19 Yes -0.39
09SRCB 2012-06-27 Up No -0.05 Yes -0.62
09SRCB 2010-05-28 Up No 0.13 Yes 0.25

Table 5. T-statistics of mean bond spread reaction

T-statistics P-value Significant
Mean bond spread before/after the event window (-1,+1) 0.8007 0.4327 NO
Mean bond spread before/after the event window (-30,+30) 0.6176 0.5437 NO