Comprehending China's Domestic Ratings: A Perspective from Default Probability-Implied S&P Ratings

We establish a mapping between the Chinese domestic agency ratings and S&P global ratings by matching firms' expected default probabilities (PDs) estimated using a dynamic logit model with the actual default rates of S&P ratings. The Chinese agency ratings are inflated by ten notches in light of the S&P rating standard. For example, the domestic AAA, AA, and A correspond to S&P BB+, BB, and BB- by median default probability. The PD-implied S&P ratings outperform the domestic agency ratings in predicting default and complement the latter explaining credit spread. Their superior default predictive power originates from using dynamic operating efficiency-related information. In contrast, the agency ratings give more weight to scale-based firm characteristics.