China’s Credit Agencies under Scrutiny for Inflating Ratings amidst Spate of Bond Defaults


China’s industry associations have taken the country’s credit agencies to task for inflating the ratings they provide to domestic debt issuers, in the wake of a wave of bond defaults by state-owned enterprises (SOE).

The Securities Association of China (中国证券业协会) (SAC) and the National Association of Financial Market Institutional Investors (中国银行间市场交易商协会) (NAFMII) jointly issued a notice on 3 December on the compliance conditions of Chinese credit ratings agencies in the third quarter of 2020.

According to the Notice Chinese securities regulators in conjunction with SAC and NAFMII representatives conducted joint on-site inspections of seven ratings agencies in the third quarter, including Dagong Global Credit Rating.

The inspections uncovered a number of compliance issues, including problems with ratings methods, models and database systems; inadequacies when it came to ratings quality control, incomplete ratings materials, and failure to properly file materials.

The Notice said that the SAC and NAFMII had also caught sight of a marked increase in the volume of upwards ratings adjustments for bond issuers in the third quarter, and that there was risk of “inflated” ratings.

According to the Notice credit ratings agencies made adjustments to the ratings of 89 issuers in the third quarter, for a YoY increase of 20.27%. 60% of these ratings adjustments were positive, with an corresponding YoY increase in the number of issuers whose ratings saw an rise after they switched agencies.

Dagong Global Credit Rating was responsible for the largest number of upwards ratings adjustments for issuers switching ratings agencies at 13 in total, accounting for 40.63% of issuers who made it their new ratings agency.

NAFMII said that it had engaged in discussions with Dagong Global as well as China Chengxin International Credit Rating, to “emphasise that ratings agencies must monitor risk information that could affect changes to the credit levels of ratings targets, and employ the role of credit ratings in providing advance risk warnings.”

The issue of the Notice arrives just after China’s bond market has been rocked by a wave of defaults on the part of leading state-owned enterprises that were previously considered to be reliable bets due to the backing of the Chinese government.

On 10 November Yongcheng Coal & Electricity Holding Group – an SOE based in Henan province, announced that it was defaulting on one billion yuan (approx. USD$152 million) in short-term bonds that it had issued just weeks previously.

A meeting of China’s Financial Stability and Development Committee (FSDC) convened on 21 November announced that further defaults were also likely to occur.