China suspends top credit rating agency as defaults hit market


China has suspended one of its top credit rating agencies after a former executive was accused of taking “massive” bribes, as a growing pile of defaults rattle the country’s $4tn corporate debt market.

The China Securities Regulatory Commission announced on Tuesday that it was temporarily freezing the licence of Golden Credit Rating and had forbidden the agency from taking on new business for three months.

The move came as Shandong Ruyi, China’s largest textile manufacturer, looked set to default on a second bond in as many days.

China’s debt markets, the world’s second-biggest, have been hit by a series of defaults by state-run enterprises in recent weeks that have torpedoed investor assumptions that authorities will always bail out these groups.

The securities regulator on Tuesday said Golden Credit had failed to justify some of its credit ratings and upgrades. It ordered the agency to “immediately carry out a comprehensive rectification . . . strengthen internal controls and compliance management, strictly police business practices and improve the quality of ratings”.

China’s credit rating agencies have been criticised for standing by their triple A ratings for troubled state-owned companies in the face of the defaults. “Most private investors do not take credit ratings seriously as the system does a bad job in measuring risks,” said a former executive at a large credit rating agency in China.

He said agencies are motivated to inflate their ratings to attract clients and are pressured to support government-linked groups’ financing efforts.

The executive called the suspension of Golden Credit “a political decision”. “The government wanted to set [it] as an example and make others behave,” he added.

The problems in China’s bond markets come as foreign investors have this year increased their holdings of Chinese treasuries and debt issued by big policy banks, the latter at a record. However, their exposure to the default-hit corporate credit market is low.

Bar chart of Long-term credit issuer ratings from domestic rating agencies showing China's onshore credit ratings steady in the face of defaults

Shandong Ruyi, once known as the LVMH of China, defaulted on a bond worth $153m on Monday. The company looked set to miss payment on a separate Rmb1bn ($153m) bond due on Tuesday.

“In a way it’s the bond market hitting puberty,” said Edmund Goh, director of Asia fixed income at Aberdeen Standard Investments, of the recent defaults.

He added that the repayment woes would “definitely” give investors second thoughts about buying into corporate debt in China. Many foreign investors were already sceptical over China’s officially low default rate, which implied the presence of “zombie companies”.

“Given the outstanding size of the local government debt, and you compare that against the fiscal deficits they are running, it is almost impossible for them to bail out everyone,” Mr Goh said.

The suspension of Golden Credit came less than 24 hours after Chinese authorities said they would prosecute Jin Yongshou, the agency’s former general manager, for allegedly taking bribes to boost the ratings of issuers.

Regulators are also investigating China Chengxin, another big rating agency, after miner Yongcheng Coal and Electricity Holding kicked off November’s string of defaults. China Chengxin rated Yongcheng’s debt triple A.

The troubles at Golden Credit echo those of Dagong, previously one of China’s most prolific rating agencies, whose 2018 suspension ultimately led to a government takeover last year.

While rating agencies have issued only a handful of downgrades following the spate of defaults, the verdict from investors in China’s onshore debt markets is clearer. Yields on medium-term corporate credit have risen while net issuance of such debt fell in November, according to Standard Chartered.

While the recent defaults may not lead to widespread risks through the financial system, they will have “long-term consequences”, said Becky Liu, head of China macro strategy at Standard Chartered.

Ms Liu said those included state groups having to pay higher interest rates on their debt to “better reflect their standalone credit fundamentals” as banks become more cautious about buying these bonds. “All these point to tighter borrowing conditions ahead,” she added.

Golden Credit could not be reached for comment.



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