Major Chinese Credit Rating Firm Hit by Business Ban

One of China’s five main credit rating companies was suspended from debt rating business for one year over conflicts of interests and other violations.

The China Securities Regulatory Commission (CSRC) on Friday suspended Dagong Global Credit Rating Co. Ltd. from rating debt instruments issued on China’s stock exchanges for one year. Separately, the National Association of Financial Market Institutional Investors (NAFMII), an industry association under the central bank that oversees interbank bond market, banned Dagong’s business around debt-financing instruments.

The yearlong suspension was the harshest punishment levied by regulators on a major intermediary agency. The action took place amid a wave of corporate bond defaults, including some by companies with relatively credit high ratings from domestic rating firms.

Dagong was found to have charged high fees for consultation services to companies for which it also issued credit ratings, the CSRC and NAFMII said in their announcements.

“Credit ratings companies providing consulting services to rated companies seriously deviates from the principle of independence and is prohibited by the relevant regulations of the interbank market,” NAFMII said.

NAFMII said Dagong provided false statements and information when the regulator investigated the company’s business practices.

The CSRC also found issues including poor internal governance, misuse of corporate official seals, unqualified senior management and defective rating models.

Caixin learned that the punishment came after an internal whistleblower tip submitted to regulators that led to a joint on-site investigation last month by the CSRC and NAFMII.

Dagong was ordered to take rectification measures and replace unqualified senior management during the suspension period.

The company said in a statement Friday that it would go through a thorough rectification process and ensure compliance by all of its businesses.

The CSRC and NAFMII vowed Friday to strengthen regulations on rating companies, which may signal more action against violations by local ratings businesses.

China’s credit ratings firms have long been criticized for granting unreliable ratings. More than 90% of local bond issuers are rated by domestic agencies at AA or above, including some recent defaulters.

On Monday, Xinjiang Production & Construction Corps’ (XPCC’s) unit Sixth Division of State-Owned Asset Management Co., which had been awarded an AA credit rating by Shanghai Brilliance Credit Rating & Investors Service Co., failed to repay a 500 million yuan ($72.7 million) bond, marking the first default of a bond issued by a government-linked investment vehicle.

Shanghai Brilliance downgraded its rating of the XPCC subsidiary from AA to C after the default.