Regulators Unveil New Rules to Clean Up Credit Ratings

China has unveiled new regulations to tighten oversight and scrutiny of the credit ratings industry in the wake of a corruption scandal at one of the country’s largest providers of corporate rankings and a series of bond defaults by highly rated companies.

The measures (link in Chinese), which will take effect on Dec. 26, stipulate the responsibilities of credit ratings firms, what types of activities are banned — such as soliciting bribes or providing consulting services to bond issuers — and give details of punishments and fines that could amount to 50% of income received for a particular project or rating that is found to violate regulations.

The regulations, which have taken around three years to finalize, are part of efforts to clean up the industry as the government opens the credit ratings sector to foreign competition and tries to encourage overseas institutions to invest in the bond market, now the world’s second largest. Institutions rely on credit ratings companies to provide impartial information about the bonds and businesses they are assessing but the industry was rocked by a scandal in 2018 that undermined its credibility.

Dagong Global Credit Rating Co. Ltd. was slapped with a one-year ban on providing credit ratings after it was found to have broken a string of regulations including providing consulting services to the companies it rated, provided false statements and information when it was under investigation, suffered poor internal governance, misused corporate official seals, had unqualified senior management and defective rating models. Dagong was taken over by state-controlled China Reform Holdings Corp. Ltd. in April which is overseeing a restructuring of the company.

Shortcomings in supervision

The new regulations will “promote the role of credit ratings in risk disclosure and risk pricing, and help improve the financing environment for enterprises, prevent financial risks, and promote the high-quality development of China's financial market,” the People’s Bank of China (PBOC) said in a statement (link in Chinese) on its website Friday in the form of a question and answer exchange.

They will also “help compensate for the shortcomings of supervision and promote the standardized development of China's rating industry in the new historical period, and take it to a new level,” the statement said. They will also help build a “fair and orderly competitive environment and promote the high-level opening of the credit rating industry.”

The “Interim Measures for the Management of the Credit Rating Industry” were jointly compiled by the PBOC, Ministry of Finance, National Development and Reform Commission and the China Securities Regulatory Commission. They were posted (link in Chinese) on the central bank’s website on Friday.

Regulators are trying to restore trust and confidence in the credit ratings sector after a wave of corporate bond defaults by companies that had scored relatively high rankings from domestic ratings agencies. There are also concerns that company ratings are not being downgraded to reflect their deteriorating financial positions.

Domestic credit rating firms are now facing competition from global companies including Moody’s Investors Service, S&P Global Ratings and Fitch Ratings after the government pledged to allow them to operate independently in China rather than through joint ventures. In January 2019, the central bank approved the registration of S&P Global’s Beijing-based wholly owned unit, making it the first foreign-owned company allowed to conduct credit rating business on the mainland. Moody’s Investor Service and Fitch Ratings have also applied.

Contact reporter Tang Ziyi (ziyitang@caixin.com)

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