The inflated problem in China's onshore rating system is challenged by the rise in corporate losses

Overview

This report focuses on the credibility of China's onshore credit rating system. Nomura notes that regulators have required onshore rating agencies to reform the rating system so that it more accurately reflects local corporate credit risks. The report's core judgment is that there is a clear divergence between the excessive concentration of top ratings and deteriorating corporate financial health, suggesting that the current rating system may be insufficient to convey true risk signals to investors and policymakers.

Core views

The report argues that China's onshore credit rating system has an upward bias: on the one hand, the shares of AAA/AA+ rated issuers and debt instruments are very high; on the other hand, the proportion of loss-making industrial enterprises continues to expand. The authors emphasize that even with the AI boom still in place, the economy remains hit by a deep property adjustment, driving up credit risks for corporates and households. Therefore, without reform of the rating system, the effectiveness of risk pricing, investment decisions, and policy judgment may be weakened.

Analysis framework

The report uses a chart-alert format, comparing the distribution of onshore ratings with the proportion of loss-making companies, and cites regulatory developments, Bloomberg information, and National Bureau of Statistics data to illustrate the divergence between rating grades and corporate fundamentals.

Methodology notes

• Macro credit risk analysisComparison of rating distribution and corporate financial health

  Assess whether the credit rating system adequately reflects corporate risk through changes in the share of top ratings and the share of loss-making companies.

  If the share of top ratings rises while the share of loss-making companies also rises, it suggests that ratings may have failed to timely reflect deteriorating corporate profitability and debt-servicing capacity, implying a possible underestimation of credit risk.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China non-financial corporate debt financing instruments

  One of the report's main focus areas, with the share of top ratings reaching 74.6%.

  Strengths

  The market covers CPs, SCPs, and MTNs and serves an important financing function.

  Weaknesses

  Top ratings are overly concentrated and may fail to sufficiently differentiate issuer credit quality.

  Comparison

  Compared with the distribution of top ratings by major international rating agencies in mature bond markets, the share of AAA/AA+ in China's onshore market is significantly higher.

  Risks

  Rating overestimation may mask default vulnerabilities and cause investors to underestimate true credit risk.

• China enterprise bonds and financial bonds

  Included in the overall rating data coverage discussed in the report.

  Strengths

  They hold important market positions as financing instruments for corporates and financial institutions.

  Weaknesses

  If the rating system as a whole is inflated, risk pricing for these bonds may be distorted.

  Comparison

  The report does not provide specific subcategory rating shares, but includes them in the broader discussion of the rating system.

  Risks

  When credit risk is underestimated, market adjustment may be more abrupt, and liquidity and valuation pressures may rise.

• China macro risk assets

  Distortions in the rating system may affect macro risk appetite and policy judgment.

  Strengths

  AI-related momentum may support some sectors.

  Weaknesses

  The deep property downturn continues to weigh on corporate and household balance sheets.

  Comparison

  The AI boom has not offset the broad credit pressure caused by the property adjustment.

  Risks

  A widening share of loss-making companies, rising household and corporate credit risks, and delayed recognition of potential default risks.

Key data

• Share of AAA/AA+ issuers59%The proportion of Chinese issuers rated AAA/AA+ in 1Q 2026.
• Share of AAA/AA+ non-financial corporate debt financing instruments74.6%The share of top-rated non-financial corporate debt financing instruments rose further.
• Share of loss-making industrial enterprises23.8%The share of loss-making industrial enterprises in 2025, the highest since 2000.
• Share of loss-making industrial enterprises in 201711.8%Used as a comparison benchmark, showing that the loss-making ratio has expanded significantly since 2017.
• Share of loss-making industrial enterprises in the first four months of 202632.4%Higher than 31.7% in the same period last year, pointing to continued pressure on corporate operations in 2026.
• Coverage of rating dataAvailable since 2025Overall rating data cover non-financial corporate debt financing instruments, enterprise bonds, and financial bonds; non-financial corporate debt financing instruments include SCPs, CPs, and MTNs.

Impact & implications

If the rating system cannot effectively differentiate credit quality, investors may underestimate the default risk of corporate bonds and related financing instruments, while credit spreads and capital allocation may also become distorted. For policymakers, inflated ratings may reduce visibility into stress in the corporate sector and affect risk-resolution and financial regulatory decisions.

Risks

• The excessive concentration of top ratings in the onshore rating system may weaken credit risk identification.
• The continued rise in the share of loss-making industrial enterprises indicates deteriorating corporate financial health.
• The deep property downturn continues to push up credit risks for corporates and households.
• Distorted rating signals may mislead investor pricing and policymaker judgment.
• The report relies on public data and third-party information, and some aggregate rating data are only available starting from 2025.

What to watch

• Follow-up requirements from Chinese regulators for reform of onshore rating agencies and the strength of implementation.
• Whether the share of AAA/AA+ rated issuers and debt instruments declines.
• Whether the share of loss-making industrial enterprises continues to rise in the remaining months of 2026.
• Transmission of the property downturn to corporate cash flow, household balance sheets, and credit risk.
• Credit spreads, default events, and the pace of rating adjustments for non-financial corporate debt financing instruments, enterprise bonds, and financial bonds.