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China economy

Chinese credit rating agency Dagong suspended after cash-for-ratings probe

Watchdog orders firm to cease domestic services for a year after it was found to have compromised its independence by charging excessive fees

PUBLISHED : Saturday, 18 August, 2018, 5:34pm
UPDATED : Saturday, 18 August, 2018, 10:06pm

A Chinese credit rating agency has been ordered by Beijing to suspend services in the Chinese market for a year after it was found to have effectively sold good ratings to bond issuers.

The uncovering of irregularities at the Beijing-based Dagong Global Credit Rating Co exposed the lack of independent and trustworthy credit ratings in the Chinese bond market – a problem that amplifies the risks for fixed-income product investors.

China’s market is currently closed to the big three international rating houses – Moody’s, S&P Global Ratings and Fitch Ratings.

While Beijing has promised to open up the market and will soon allow foreign credit rating agencies to provide services independently, for now foreign rating agencies are only allowed to take part in joint ventures.

Among the 1,744 Chinese bond issuers rated at the end of June, 97 per cent of them were rated with AA and above, according to National Association of Financial Market Institutional Investors, the watchdog of China’s internet bank market.

Of those, 464 bond issuers were given the highest rating possible.

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Dagong is estimated to have about 20 per cent of the market share in China.

While Dagong only gave US sovereign credit worthiness a BBB+ rating, saying it was sceptical about whether the US government would honour its debts, it was more generous when handing out high ratings at home.

About a fifth of its clients have received a boost in their rating since the start of 2017 – at a time when debt default risks have risen because of slowing growth and tighter liquidity.

In a recent case, Sunshine Kaidi New Energy Group, a private firm, was given an AA rating from Dagong in early 2018 even when there were public reports about the company’s troubles. The company later defaulted on 18 billion yuan (US$2.6 billion) worth of bonds in June.

Dagong has since cut the company’s rating four times and it now stands at C. Sunshine Kaidi was not accused of any wrongdoing during the investigation into Dagong.

NAFMII, an agency under the People’s Bank of China, said in a statement on Friday that Dagong had been found to have “directly provided consulting services to rated companies”, which is prohibited, and “charged high fees” that compromised its independence between November 2017 and March 2018.

In also said Dagong had provided false statements and untrue information to the watchdog during its investigation, adding that its actions had a “very negative” impact on the market.

The Chinese Securities Regulatory Commission, which looks after bonds traded on the country’s two stock exchanges, said in a separate statement that a site inspection had found serious problems in the rating agency, including “chaotic internal governance”, “charging consulting fees from those being rated”, “hiring executives without professional qualifications” and the “loss of original documents for some rating services”.

Both watchdogs decided to suspend Dagong’s domestic credit rating services for a year.

The company has issued a statement in which it apologised.

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While the reliability of Chinese rating agencies has long been called into question, the punishment of Dagong is harsh and showcased Beijing’s growing seriousness about cleaning up the market at a time when repayment risks are on the rise.

A source within Dagong, who declined to be named, told the South China Morning Post that its “sovereign rating” services, which were intended to break the “monopoly of Western rating agencies” would continue.

While it is not known whether Dagong has any clients buying its sovereign rating services, it has been constantly updating its ratings for countries since 2010.

In January, Dagong cut its outlook and rating for the US to BBB+, putting the debt repayment capacity of the world’s biggest economy below that of Russia and Botswana.

Dagong’s resentment of “Western” rating agencies echoes Beijing’s stance.

When Moody’s and S&P downgraded China’s sovereign rating last year, the Ministry of Finance hit back, saying they were ignorant of China’s economic reality.

Beijing did not invite any agency to issue a rating when it issued US$2 billion worth of US dollar sovereign bonds in Hong Kong in October 2017.