Echoes of US subprime seen in China debt ratings
Market warned that competition among China's rating agencies is leading to a fall in standards
Competition among China's credit-rating agencies is intensifying, leading to a slide in standards reminiscent of what happened in the US before the financial crisis, according to Dagong Global Credit Rating.
China's onshore bond market has seen its first default, with Shanghai Chaori Solar Energy Science & Technology failing to make an 89.8 million yuan (HK$113.7 million) interest payment which was due yesterday.
The solar cell maker sold one billion yuan of five-year debt in March 2012 and the notes were rated AA, the fourth-highest investment grade, by Pengyuan Credit Rating when they were issued. The debt was later downgraded twice, most recently to BBB-plus in April 2013.
"China's rating system has problems similar to those in the US in 2008," said Guan Jianzhong, the chairman of Dagong.
"There's cutthroat competition and it's not about who accurately evaluates the risks, but comes down to prices and ratings."
It’s not about [accuracy] … but comes down to prices and ratings
The US Financial Crisis Inquiry Commission said in 2011 that inflated credit grades were partly to blame for the worst downturn since the Depression that began in 1930, as rating companies lowered standards to win business amid a housing boom that fuelled issuance of mortgage-backed bonds.