China’s largest credit rating agency, Dagong Global Credit Rating Co., has been ordered by state regulators to suspend its operations for a year after it was found to have been selling ratings to client firms.
A whistleblower in Dagong reported the company’s misdeeds to state regulators, according to Chinese business news magazine Caixin.
When bond issuers were assessed by Dagong, the agency would request that they purchase consulting software sold by its affiliated companies.
To gain an AA+ rating, Dagong would mandate that firms purchase its data management system, which costs 9.7 million yuan ($1.4 million), with an additional 800,000 yuan (about $116,000) service fee per year.
A total of 26 firms purchased Dagong’s consulting software in exchange for good ratings, including the Shin Kong Group, a conglomerate involved in financial services, manufacturing, and medical services.
Investors were concerned when Shin Kong’s liquidity looked to be in danger during the latter half of 2017. At one point, the yield on many of its bonds exceeded 30 percent. But in March 2018, Dagong still gave the company an A+ rating, according to Chinabond, an information provider on China’s bond market.
South China Morning Post also cited the case of Sunshine Kaidi New Energy Group, a private firm that constructs power plants and makes new energy products. Earlier this year, it received an AA rating despite reports about the company’s woes. The company eventually defaulted on 18 billion yuan ($2.6 billion) of bonds in June. Dagong has since downgraded its rating to C. State regulators have not named Sunshine Kaidi as being involved in any wrongdoing in connection with Dagong.
But Dagong’s behavior has highlighted the lack of truly independent credit agencies for assessing bonds in China.
China’s Securities Regulatory Commission said in a statement on Aug. 17 that a site inspection also revealed the agency had “chaotic internal governance,” hired “executives without professional qualifications,” and lost “original documents.”
In addition, the National Association of Financial Market Institutional Investors, a watchdog of China’s internet bank market, said Dagong had provided false statements during an investigation.
Dagong was founded in 1994 and has rated companies in more than 70 industries with a total bond issuance of over 1 trillion yuan ($145.8 billion), according to its website.
Currently, China’s market is mostly closed to foreign credit rating agencies. They are only allowed to assess joint ventures.
China’s state-run newspaper Securities Times estimates that Dagong’s suspension of services will involve 272 firms, with 1,781 bonds totaling 1.92 trillion yuan ($280 billion). This has been the harshest penalty on a ratings company to date.
Chinese newspaper National Business Daily also noted that since 2014, there have been 116 incidents of violations involving credit ratings of bonds; 12 involved Dagong.
“Where is the credibility? Where is the trust? It is only because of Dagong’s government background that it can rule in China,” independent economist Gong Shengli said in an interview with The Epoch Times’ Chinese-language edition.
Dagong was established under the auspices of China’s central bank, the People’s Bank of China, and the state’s State Economic and Trade Commission.
Luo Ya and Zhou Huixin contributed to this report.