China issues sweeping new rules for credit rating companies

What’s up: China has issued sweeping new regulations for credit rating companies, a key step towards better oversight of scandal-ridden industry.

The rules, jointly issued by five organs of central government, including the central bank and the chief economic planner, set out requirements for rating business transactions, corporate governance and corporate disclosure, as well as penalties in the event malpractice of the sector.

The rules require companies to assess their creditworthiness against the probability of default and reduce the proportion of well-rated bond issuers to a “reasonable range,” allowing investors to better differentiate bonds. The rules also require rating agencies to do more to avoid conflicts of interest, urging them to redouble their efforts to isolate credit rating services from other operations.

The document gives rating firms a grace period to comply with the new rules by the end of 2022.

The background: The domestic credit rating industry has spawned doubts on the reliability of credit scores. A wave of bond defaults by well-rated state-owned enterprises (SOEs) shaken Chinese bond market last year and led to accusations that rating companies were handing out overly bullish ratings to secure clients.

Flawed rating methodology, conflicts of interest and corruption have all played a role in recent industry failures, experts said. Last month, Dagong Global Credit Rating Co. Ltd., one of China’s largest debt rating companies, has been ordered to repair its operations after allegedly failing to adequately review or inspect the companies it appraised.

Quick Takes are condensed versions of stories related to China for quick news that you can use. To read the full story in Chinese, Click here.

Contact reporter Han Wei ([email protected]) and editor Bob Simison ([email protected])

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