China Issues Sweeping New Rules for Credit Rating Companies

What’s new: China issued sweeping new regulations for credit rating businesses in a key step toward bringing the scandal-plagued industry under better oversight.

The rules, jointly issued by five central government bodies including the central bank and the top economic planner, spell out requirements for rating companies’ business operations, corporate governance and disclosure, as well as punishments for industry malpractice.

The rules require companies to score creditworthiness based on the probability of default and reduce the proportion of highly rated bond issuers to a “reasonable range,” enabling investors to better differentiate among bonds. The rules also require that rating bureaus do more to avoid conflicts of interest, urging them to strengthen efforts to insulate credit rating departments from other operations.

The document gives rating businesses a grace period to comply with the new rules by the end of 2022.

The background: The domestic credit rating industry has engendered doubts about the reliability of credit scores. A wave of bond defaults by highly rated state-owned enterprises (SOEs) rattled China’s bond market last year and led to accusations that rating businesses were handing out excessively optimistic scores to secure clients.

Flawed rating methodology, conflicts of interest and corruption have all played a role in the industry’s recent failures, experts said. Last month, Dagong Global Credit Rating Co. Ltd., one of China’s largest debt rating companies, was ordered to fix its operations after allegedly failing to adequately scrutinize or inspect the businesses it was evaluating. 

Quick Takes are condensed versions of China-related stories for fast news you can use. To read the full story in Chinese, click here.

Contact reporter Han Wei (weihan@caixin.com) and editor Bob Simison (bobsimison@caixin.com)

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