August 17, 2018 / 7:05 AM / 3 months ago

In rare move, China punishes ratings agency Dagong over violations

SHANGHAI (Reuters) - One of China’s biggest debt rating agencies has been punished by the securities regulator and a supervisory group under the central bank, in a rare rebuke that underscores Beijing’s concern about credit risks at a time of slowing economic growth.

FILE PHOTO: A man walks through the reception hall of Beijing-based Dagong Global Credit Rating Co. in Beijing, November 29, 2013. REUTERS/Jason Lee

China’s credit ratings industry has a reputation for providing favorable ratings for local issuers, downplaying risks, even as some international watchdogs warn debt is at levels that could trigger a financial crisis.

Dagong responded to the authorities' latest moves by apologizing for its risk management problems and said it would rectify its operations, according to a statement on its website www.dagongcredit.com

The China Securities Regulatory Commission (CSRC) said on Friday it would ban Dagong Global Credit Rating Co Ltd, one of the country’s four big bond rating companies, from taking on new securities rating business for a year, and forbade it from replacing senior management during that period.

That announcement came after the National Association of Financial Market Institutional Investors (NAFMII), an official industry group under the arm of the central bank, said it would suspend Dagong’s business around debt-financing instruments for non-financial firms, also for one year.

Both the CSRC and NAFMII said that Dagong had provided consultation services to firms that it also issued credit ratings for.

The CSRC also criticized the company for poor internal management, unqualified management and assessment committee members, and missing modeling data.

NAFMII said Dagong had provided false statements and information when NAFMII was investigating Dagong’s business practices.

Dagong said it would seek to resolve issues facing China’s ratings agencies but did not specify what these issues were.

“We will seriously look into new situations and new problems faced by the industry to ensure our operations and work meet legal standards,” Dagong said.

Neither the CSRC nor NAFMII said which companies seeking ratings were involved in the violations.

“Credit ratings agencies providing consulting services to companies seeking ratings seriously deviates from the principle of independence, and is prohibited by the relevant regulations of the interbank market,” NAFMII said in the statement.

Dagong “violated industry norms, business rules and basic compliance requirements and caused serious adverse effects on the market,” it added.

Market watchers initially downplayed the NAFMII punishment, which they said amounted to a slap on the wrist.

But the CSRC restriction targets Dagong’s core business. An executive at a local asset management firm said freezing Dagong’s ratings business would leave it “almost bankrupt”.

A trader at an asset management firm in Shanghai said that he expected more action against local ratings agencies, with the CSRC vowing on Friday to strengthen punishments for violations.

GRADE INFLATION

Samuel Chien, managing director of Shanghai BoomTrend Investment Management, said that companies seeking ratings often shop around among the domestic agencies, giving their business to the agency that grants them better ratings.

The result is a market in which issuers with ratings of AA or higher are behind more than 90 percent of outstanding credit bonds by value. In other countries, such rankings are reserved for only the strongest and safest investment-grade debt.

“Risk differentiation is increasingly difficult in China, which could hamper investors’ confidence,” said Gary Ng, an economist with Natixis in Hong Kong.

“This is not desirable as China needs the bond market more than ever to fund the upcoming fiscal stimulus. Any credit event created by underestimation of risk could worsen risk appetite of investors, and (lead to) a higher yield and funding cost for both local governments and corporates,” he said.

This year has seen a rash of corporate bond defaults, including some by issuers that had been awarded relatively high ratings by domestic firms.

On Monday, Xinjiang Production and Construction Corps (XPCC) Sixth Division State-Owned Asset Management Co Ltd, which had been awarded an AA rating by Shanghai Brilliance Credit Rating & Investors Service Co, missed principal and interest payments on a short-term commercial paper issue, in a rare default by a local government financing vehicle.

While China has moved to ease credit conditions and encourage investment in corporate bonds to support struggling private firms amid signs of slowing economic growth, corporate issuers have not been the main beneficiaries of these policies.

Dagong is one of China’s most prominent ratings firms, and has achieved some recognition outside China for its sovereign issuer ratings.

In January, Dagong cut the sovereign ratings of the United States to BBB+ from A-, equivalent to those for Peru, Colombia and Turkmenistan, citing concerns that tax cuts could weaken Washington’s ability to repay debt.

Reporting by Andrew Galbraith; Additional reporting by the Beijing and Hong Kong Newsrooms; Editing by Sam Holmes and Jon Boyle

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