Top China Credit Ratings Agency Sanctioned Twice in One Month

Dagong’s punishment underscores Beijing’s efforts to clean up the scandal-plagued credit ratings industry in the wake of a recent wave of corporate bond defaults. Photo: VCG

Dagong Global Credit Rating Co. Ltd., one of China’s largest debt ratings agencies, has been ordered to rectify its operations after allegedly failing to adequately scrutinize or inspect the businesses it was evaluating, earning its second official sanction in a month.

The Beijing-based company had not conducted the necessary analysis of the major factors impacting solvency of some debt issuers and failed to carry out onsite inspections or interviews in accordance with the regulations when evaluating credit risks, according to a statement (link in Chinese) released Friday by the local branch of the China Securities Regulatory Commission (CSRC).

The company was also found to have adjusted its ratings models without giving sufficient reasons, it said.

The penalty underscores Beijing’s efforts to clean up the scandal-plagued credit ratings industry in the wake of a recent wave of corporate bond defaults by several highly rated companies. Multiple industry insiders expect China will mete out additional punishments to more credit ratings agencies in the near future following investigations of the recent bond defaults.

The regulator ordered Dagong to “immediately carry out comprehensive rectification … formulate scientific ratings methods and sound quality control systems and implement them effectively, and strengthen employee awareness of compliance and risk control,” according to the statement.

The company is required to complete these measures within six months and file written progress reports to the regulator each month.

This was just the latest disciplinary action to be meted out to Dagong, having received a 14.6 million yuan ($2.3 million) fine (link in Chinese) on June 11 from the central bank’s operations office for several lapses, including failing to ensure the independence of its credit ratings businesses.

Credit ratings providers, which are supposed to fairly evaluate corporate financial health, have long been criticized in China for providing generous scores for issuers and downplaying credit risks to secure clients.

These have included Yongcheng Coal and Electricity Holding Group Co. Ltd., a major state-owned coal mining company, which was given the highest AAA rating by China Chengxin International Credit Rating Co. Ltd. China Chengxin was later banned in December from rating any new interbank bonds for three months over misconduct related to a Yongcheng Coal default.

In the same month, another credit ratings agency, Golden Credit Rating International Co. Ltd., was required to undergo a three-month rectification and banned from engaging in new ratings business in the exchange market during the period. The punishment came as the company’s two former executives were detained for taking bribes.

Flawed ratings methodology, conflicts of interest and corruption have all played a role in the industry’s recent failures, multiple people familiar with the industry have said. In 2018, China’s bond regulators banned Dagong from taking on new securities ratings business for a year, as it charged the companies it rated exorbitant fees for consulting services.

Sources with knowledge of the matter told Caixin at the time that Dagong required at least 26 bond issuers to purchase its consulting software before it would increase their ratings or the ratings of their bonds.

Contact reporter Tang Ziyi (ziyitang@caixin.com)

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