China Rating Firm Banned as Regulators Cite Fake Info, Chaos

(Bloomberg) -- Dagong Global Credit Rating Co. issued an apology after it was banned by Chinese regulators from assessing bonds for a year, the most severe punishment ever doled out to a ratings company.

Dagong’s management was "chaotic", the China Securities Regulatory Commission said on Friday, when it announced the penalty. The National Association of Financial Market Institutional Investors, which oversees short- and medium-term notes in China also handed out a ban, said the company provided fake information to the regulator and charged borrowers high fees for consulting services, which “seriously violated" its independence as a ratings firm.

Dagong "expresses its deepest and most sincere apology to the public" for what it described as internal risk control problems, according to a statement on its website. It also committed to “following, completely and meticulously, the guidance of the regulatory authorities by implementing all the changes and corrections” required. The firm has submitted petition documents to relevant authorities, it said. An operator who answered the general line at Dagong declined to transfer the call to its media department without a name.

The punishments are the most severe so far on a ratings company as China steps up scrutiny of financial companies to rein in risks in its deleveraging campaign. Authorities have repeatedly reprimanded such firms for issues including lack of due diligence and incorrect rating reports. Yet, penalties had been considered light. China Lianhe Credit Rating Co. was warned by the association last year due to a lack of quality control in the rating process, according to NAFMII’s website.

Growing Pain

“It’s just part of the growing pain of China’s domestic credit market and the rating industry and a sign of improving maturity of the local bond market,” said Steve Wang, deputy head of research at BOC International Holdings Ltd. Chinese regulators and market participants demand more transparency and independence of rating agencies while clearing out the inherited conflict of interest, he said.

Out of all local credit raters, Dagong’s rating actions show the highest proportion of upgrades among issuers it assesses, at 19 percent, since the beginning of 2017, according to a Friday report from Everbright Securities Co.

Foreign investors have long cited inflated ratings offered by local firms as a key reason for not investing in onshore corporate notes. In order to speed up reform and competition, China opened the door for foreign rating companies last year. Yet so far, no international raters have set up wholly-owned units in the country.

Dagong, founded in 1994, has rated companies in over 70 industries with total bond issuance of over 1 trillion yuan ($145.8 billion), according to its website. It has offices in Hong Kong and Europe.

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To contact Bloomberg News staff for this story: Lianting Tu in Hong Kong at ltu4@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net;Tongjian Dong in Shanghai at tdong28@bloomberg.net;Annie Lee in Hong Kong at olee42@bloomberg.net

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With assistance from Editorial Board