2015-04-01

China's Fake Bond Ratings

Corruption in bond ratings is an open secret in China, an improvement on the situation in the U.S. of A. American ratings agencies gave AAA ratings to garbage pre-2008 and the U.S. Treasury punished S&P for downgrading the U.S. government's credit rating.

Bloomberg: China Rating Companies Say Honesty Doesn’t Pay as Risks Ignored
Dagong Global Credit Rating Group’s chairman says some of China’s debt rankings are “useless” and pose a risk to the world’s second-largest economy. Its biggest local rivals agree the industry needs tighter regulation.

Dagong has seen its market share halve in six years to 20 percent due to “irresponsible” competitors, Chairman Guan Jianzhong said in a March 24 interview in Beijing. Some companies are compromising evaluations to win business and a lack of defaults has made it hard to gauge the assessors’ trustworthiness, according to Dagong, China Lianhe Credit Rating Co. and China Chengxin International Credit Co.

...“We do face huge pressure from issuers,” Mi said. “There are so many cases where we try to give B ratings and the companies just abandoned us and turned to other rating firms.”

Some new graders tend to give “more aggressive ratings to grab market share,” as competition intensifies and as issuers press for high assessments, Rebecca Yan, Lianhe’s President and Chief Executive Officer, said in an interview in Beijing Apr. 1.

...“Good rating firms, kidnapped by the current system, can only perish, while irresponsible and inferior firms will survive,” said Dagong’s Guan.
Why is this news now? Chinese companies have seen their balance sheets erode in the past couple of years and they are pressing ratings agencies to ignore it. A lower rating, and the higher interest rates that come with it, could be the difference between solvency and insolvency for many firms.

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