Commentary on Political Economy

Monday, 14 December 2020


Hahaha! The Foxes Looking After the Chickens! Ratland China to prosecute rating agency manager over ‘massive’ bribes

A string of defaults by highly rated issuers last month sent shockwaves through China’s $15bn public debt market © REUTERS

Chinese authorities are to prosecute the former general manager of a leading credit rating agency for allegedly taking “massive” bribes, as Beijing vows to improve oversight of the industry in the wake of unprecedented bond defaults.

The Central Commission for Discipline Inspection announced on Monday that Jin Yongshou, former general manager of Golden Credit Rating, would be prosecuted for allegedly taking bribes from issuers covered by the agency and helping numerous companies improve their credit ratings.

The watchdog made the announcement a day after the People’s Bank of China pledged to improve its supervision of the country’s rating agencies. Last month there was a string of defaults by highly rated issuers that sent shockwaves through China’s $15bn public debt market.

The prosecution of Mr Jin, together with a former local general manager for Golden Credit, comes a year after authorities announced the pair was under investigation for allegedly accepting money to boost companies’ credit ratings, according to the CCDI. Companies without a high enough rating cannot issue publicly traded debt.

On Sunday, Pan Gongsheng, vice-president of the PBoC, criticised the industry for artificially high ratings, poor differentiation of issuers’ credit risk and other issues that have “constrained the high-quality development” of the country’s bond market.

Regulators have recently reprimanded domestic rating agencies, including Golden Credit rivals China Chengxin and Dagong, for their slow responses to growing credit risk at the issuers they cover.

China Yongcheng, the coal miner that was the first to default last month, was rated triple A when it missed its first payment. China Chengxin, which covers Yongcheng, is under investigation in relation to its rating for the company.

Just five companies out of more than 5,000 were downgraded last month to below double A by domestic rating agencies — the minimum level at which regulators allow companies to issue debt in China’s interbank market.

Together with intense competition from rival rating houses, most of which are state-run or have substantial government ties, Chinese agencies have little appetite to risk losing business by rating clients below double A.

That can bring down entire agencies responsible for rating much of China’s onshore debt. In March 2019, an official investigation of Dagong found conflicts of interest and a lack of quality control that ultimately led to the group being taken over by a state-run investor the following month.

But the prosecution of Mr Jin is not explicitly connected to the recent defaults, and analysts expressed scepticism that there would be a wave of similar incidents.

“We don’t expect it to be a common practice, but more ad hoc,” said Bruce Pang, head of macro strategy research at China Renaissance Securities.

“They [the regulators] want to release some signals,” he added, pointing to a need for them to keep a “closer eye on all these professional service agencies”.

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