The credit rating agency in southwestern Guangxi province's Fuzhou region published a full-page advertisement in bright red ink in the local newspaper to declare the results of its latest set of ratings: 19 AAA companies, 34 AA ones and more than 40 A ones. No matter that the agency did not explain what its ratings meant or how it arrived at them. The message was plain. These were good companies that would receive 'preferential treatment'. Although such ratings by local bank branches may boost the stature of some enterprises locally, to foreign investors and economists they only reflect the unreliability and infancy of the domestic credit ratings industry. 'These are garbage ratings,' Joe Zhang, an economist with W.I. Carr in Hong Kong, who previously worked for the People's Bank of China, said. 'It's a joke. If your relations with the rating agency are better than another company's, then you'll get a better rating.' Since 1985, agencies under regional branches of the People's Bank of China have been issuing credit ratings of their customers. For the banks, it meant an additional source of income; for the companies, a new source for publicity. China has almost 50 so-called credit rating agencies and hundreds of small-time operations run by county banks as consultancies and accounting firms. Only two securities rating institutions - China Chengxin Securities Ratings Co and Dagong International Securities Rating Co of Beijing - have been approved by the central bank as national agencies, and then only within the past four years. Chengxin and Dagong, and other respected companies such as Shanghai Far East Credit Rating Group and Shenzhen Credit Rating Agency, are hoping to become national players, but local protectionism has so far prevented much consolidation of the industry. 'Getting approval to go national this year is a possibility, but actually getting business outside of Shanghai will be difficult,' Yao Tinggang, president of Shanghai Far East, said. Set up in 1988, Shanghai Far East was the first credit rating agency in China which was independent of the People's Bank of China. The city's mayor decreed that any company in the city that wanted to issue bonds or commercial papers had first to receive a credit rating. Mr Yao complained that the industry was full of favouritism, as agencies with close ties to local and central governmental institutions could get preferential access to rating large bond issues. Chengxin, China's first securities rating company with a national mandate, was only set up in 1992, while Dagong was established in 1994. Beijing gave Chengxin the privilege of rating corporate debt issues valued at over 100 million yuan (about HK$92.86 million). The agency is headquartered in Beijing, with branches in Hainan, Guangdong, Hubei and Zhejiang provinces. Chengxin general manager Li Xinhong denied that connections played a large role in Chengxin's ability to rate large debt issues. 'Most of the big bond business comes to us through the market because of our status and the size of our operations.' Last year Chengxin rated about 10 billion yuan worth of bonds. This year it expected to top that amount. At the regional level, rating agencies such as Shanghai Far East have seen their business shrink under the nationwide tight credit policies in place since mid-1993. Mr Yao said Shanghai Far East rated about 170 debt issues in 1993 but only half that in 1994 as high inflation led to negative interest rates. Last year it climbed back to about 140 issues. He said the austerity measures had meant that nearly all the regional issues had been for commercial paper - which expire in less than a year - rather than corporate bonds. Six-month commercial papers paid an annualised interest rate of about 9.8 per cent, while one-year papers paid 10.98 per cent - or between 20 per cent and 40 per cent higher than standard deposit interest rates, he said. The World Bank said in a November 1995 report that a belief in implicit guarantees on corporate bond issues had kept China's rating business from developing quickly. Other reasons included the lack of standardisation among domestic agencies' rating systems; the immaturity of China's securities industry; and structural weaknesses in the banking system. Paul Coughlin, managing director in Hong Kong for Standard & Poor's, said: 'What you have is a multiplicity of rating agencies with different connections, and some that only do ratings on the side. Very few have a critical mass of ratings or the necessary background and track record. 'It is difficult to judge a Beijing company as compared with a Shenzhen one because no one provides a national rating. We are still in the early stages of the game.' International rating agencies such as Standard & Poor's (S&P), Moody's Investors Service, Thomson BankWatch and Capital Intelligence all said that they had no plans to form joint ventures with domestic agencies at this time. Although China's corporate bond market has been growing, it has also been plagued by a higher number of defaults as some enterprises turned to bonds for capital when they were denied loans from banks under the tight money policy. 'The future of the corporate bond market depends on whether China allows the contradictions in its policy process to persist, or whether it regulates the bond market in some way,' Mr Coughlin said. Foreign agencies such as Moody's and S&P have so far kept to rating China's overseas debt issues, while bank rating services such as Capital Intelligence and Thomson BankWatch have rated the main Chinese banks which have overseas credit lines with other banks. No domestic rating agency had the clout to rate overseas debt yet, or was likely to have until about 2000, domestic agencies said. There was a general feeling that only after the smaller players were weeded out, leaving five to 10 national firms, would the industry become standardised and widely respected. Edward Young, managing director at Moody's Hong Kong office, said: 'The main differences between domestic and international rating agencies are perspective and the framework we use to compare companies. Moody's rates over 7,000 corporations, banks and government organisations around the world.' Peter Dingledein, head of Capital Intelligence's Hong Kong office, said the mainland needed a thorough overall of its banking and accounting systems. 'It is difficult to come by very accurate information. Unless there is a proper accounting system for banks as regards asset quality and loan provisioning there is not much we can investigate.'