China United SME Guarantee Corporation 's (Sinoguarantee) rating of Ba1 reflects the company's good business prospects and market position, and its adequate claims-paying resources to support its business growth.

Sinoguarantee is one of the largest companies in China's fragmented financial guarantee industry. The company's franchise is supported by its quasi-government background and the availability of substantial business opportunities. These opportunities have arisen because local-government financing vehicles, and small and medium-sized enterprises (SMEs) seeking financing are increasingly relying on guarantee companies to provide credit enhancement in the context of credit tightening by banks.

However, Sinoguarantee's rapid business growth has strained its capitalization. In addition, the company's portfolio has not been tested through a credit downturn. Delinquencies could rise as some of the company's clients may default amid the economic rebalancing in China.

In addition, the transparency of some of Sinoguarantee's insured companies is limited. The ultimate debt repayment ability of the local-government financing vehicles (LGFVs), which account for most of the company's exposure, is highly uncertain, especially amid recent tightened regulations on LGFVs. Furthermore, the company's portfolio has high single-borrower concentration, exposing it to substantial capital volatility.

The company invests in riskier asset types, such as collective trusts and wealth management products, to generate higher yield. These investments are more volatile than traditional fixed-income assets, and their performance may be correlated with the company's underlying guarantee portfolio.