Abstract
Sovereign Credit Ratings of many countries and credit rating of dozens of firms has been downgraded since the latest financial crisis. However in China short-term financing market, the credit rating seems to show a counter-cyclical phe- nomenon. We find that when the market and the economy upsurge, the bond principal rating is relatively poor; when the market and economy downturn, the bond principal rating is relatively high. In other words, the ratings of short-term financing bills show a counter-cyclical phenomenon. We propose the liquidity hypothesis for this phenomenon that during the period of economic prosperity, market liquidity and capital is relatively abundant; therefore even the compa- nies with poor ratings have access to raise funds. When the market downturns and liquidity is poor, there are not enough funds in the market, thus the companies with poor ratings may fall to finance due to the lack of funds. Therefore, the liquidity of the market causes the bond rating to show a counter-cyclical phenomenon. Empirical research supports this hypothesis.
Highlights
Since the subprime mortgage crisis, especially after 2011, many countries’ sovereign rating and lots of corporations’ credit rating have been continuously downgraded that makes the global economy keep falling
We find that when the market and the economy upsurge, the bond principal rating is relatively poor; when the market and economy downturn, the bond principal rating is relatively high
Liquidity is poor, and there are not enough funds on the market, the companies with poor main rating may fall to finance due to the lack of access to funds
Summary
Since the subprime mortgage crisis, especially after 2011, many countries’ sovereign rating and lots of corporations’ credit rating have been continuously downgraded that makes the global economy keep falling. Besides the basic financial information as well as other “soft” information, how the macroeconomic policies impact the rating is never discussed in China Those questions are very important for global investors. [1,2,3]), a domestic report shows that the credit rating for bond in China is more likely to be upgraded during the economic downturns (see [4]), which seem to be an obvious counter-cyclical phenomenon. We propose the liquidity hypothesis for this phenomenon that during the period of economic prosperity, market liquidity and capital is relatively abundant; 1According to a document obtained by the “First Financial Daily” from the China Government Securities Depository Trust & Clearing Corporation, during 2008 to 2010, follow-up ratings of bond issuers, a total of 388 ratings upgraded, only 13 downgraded.
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