In Depth: China’s Scandal-Hit Credit Ratings Industry Seeks a New Beginning

Chinese credit rating agencies are signaling major changes in their business practices, moving from an issuer-pays to an investor-pays model in response to increasing concerns about inflated ratings and widespread default scandals in the $21 trillion bond market. This shift is evidenced by recent requests from leading agencies, such as China Cheng Xin International Credit Rating (CCXI) and China Lianhe Credit Rating, for investment managers to register on their new platforms, indicating that free access to comprehensive credit research reports may soon be replaced by tiered, subscription-based access. While simplified summaries will remain free, the full, in-depth analyses are likely to become paid products, foreshadowing a major change in how credit information is distributed and financed in China [para. 1][para. 2][para. 3][para. 4][para. 5][para. 6][para. 7][para. 8][para. 9].

Currently, Chinese ratings agencies have operated largely on an issuer-pays model, where the companies seeking ratings pay for the service, often resulting in compromised independence and inflated assessments. This trend has been especially problematic given several high-profile defaults by top-rated companies, leading investors to question the credibility and quality of ratings. To address this conflict of interest, agencies are now piloting an investor-pays model, which is expected to push agencies to provide higher quality, more objective research that better aligns with the needs of investors rather than issuers [para. 4][para. 5][para. 6][para. 7].

Under the new model, there will be a distinction between free, simplified rating summaries and full-length, detailed reports. The latter will offer systematic analyses of macroeconomic environments, industry trends, corporate governance, financial metrics, and more. This effort is being led by CCXI, China Lianhe, and Anrong Credit Rating, which collectively control about 70% of the market, with potential pilot programs starting as soon as August 2024. However, details on pricing and official rollout are still under discussion [para. 8][para. 9][para. 10].

The move towards investor-pays is not a complete abandonment of the issuer-pays model but part of broader market reforms encouraged by Chinese regulators since 2021. After a string of scandals involving overrated bonds, regulatory changes allowed companies not to disclose credit ratings on some bonds and removed the mandatory ratings requirement for exchange-issued bonds. As a result, the proportion of unrated new bond issues has soared, although top-level ratings remain disproportionately common, with over 90% of non-financial and financial corporate issuers rated AA or above—much higher than in developed markets [para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18][para. 19].

Internationally, major agencies like S&P, Fitch, and Moody’s once used an investor-pays model before shifting to issuer-pays only after gaining broad acceptance for their ratings quality. Today, these agencies derive significant revenue from subscription-based data and analytics services, indicating a potential pathway for Chinese agencies. Recent innovations in China, such as Lianhe’s 3C Evaluation System and CCXI’s QE Rating System, also reflect efforts to diversify revenue streams beyond traditional ratings [para. 21][para. 22][para. 23][para. 24][para. 25].

Despite ongoing reforms, longstanding practices remain entrenched. Many agencies continue to rely on large, bundled contracts with local governments and state-owned enterprises and maintain stable profits. Experts argue that for genuine progress, stricter supervision, enforced transparency, tougher penalties for misconduct, and the removal of market-share league tables are necessary to discourage grade inflation and restore trust in ratings [para. 27][para. 28][para. 29][para. 30]. The ultimate success of the new model, insiders note, depends squarely on the improvements in ratings quality and public trust [para. 26][para. 31][para. 32].