The Securities Association of China Piles Even More Pressure on Chinese CRAs


As an update to the last post here in Financial Regulation Matters that examined the pressure being piled onto the Chinese rating agencies by the state apparatus, today’s short post looks at further pressure coming from the ‘private’ sector within the Country.

 

Yesterday, the Securities Association of China (website available here in Chinese and here in English) – a private, non-profit organisation that was formed in 1991 and is under the ‘direction’ of the China Securities Regulatory Commission (CSRC) – produced its quarterly report and the content was damning for the domestic credit rating agencies. We have already discussed how the State is turning on the domestic industry in reaction to the widespread issues facing issuers in the country, with a number of high-profile defaults hitting the headlines. The report discusses the apparent deficiencies within the agencies, ranging from ‘insufficient disclosure’ to ‘weak inspection’ mechanisms, which it argues negatively affects the quality of the underlying ratings. Furthermore, it is alleged by the report that internal failings led to instances of missing records and loose archival management, in addition to ‘unclear standards for follow-up ratings’ and, more importantly, mismatches between rating models and rating decisions. It notes that 14 of the 23 newly defaulting issues in 2020 did not receive any negative adjustments to their ratings prior to the default becoming apparent.

 

There are a number of estimations that suggest the corporate arena within China will experience many more defaults this year, with previous negative estimations from the international rating agencies coming to fruition. This is causing concern in different countries as the world’s largest investors potentially face the consequences for corporate defaults within the Chinese territories, with American firms being highlighted as being particularly in danger. Obviously China has responded by warning that the stimulus packages within the US for companies will fuel asset bubbles that will cause global issues. Nevertheless, it is almost predictable that the State apparatus, and now the seemingly private sector, have laid the blame for this at the door of the domestic rating agencies. Whilst they do deserve the criticism, it should not be for the elements highlighted by the SAC’s report; it should be for being an economic mouthpiece, not for the alleged issues. Those issues are part and parcel for an industry that has to toe the party line; they are not representative, necessarily, of the wider credit rating model (at least to the extent that the domestic rating industry has fallen foul!) One wonders, however, what the systemic effects of this will be. If the market is forced to use market indicators of creditworthiness, the blame for failures (which will happen) will have to be directed at the market; what does that mean for the Chinese model of ‘capitalism with Chinese characteristics’? For the domestic credit rating industry, they are being systematically dismembered by the State, which indicates it does not have a strong future. But, if the approach of market-based indicators does not work, which it likely will not, then the International agencies should not be willing to take its place in theory, as they will not be able to become a mouthpiece for the State like the domestic agencies have. However, that is not to say that definitely will not, because doing so would be a. lucrative and b. could potentially fall under the ‘Chinese approach’ that the international rating agencies have articulated they will be adopting for the domestic market under the terms of their newly-acquired access. Would international investors, regulators, and issuers stomach such a disregard for impartiality if it were shown to be true? It is hard to tell, although my experience and research suggests they would, because the rating agencies exist to serve a practical and ideological purpose that does not rest on the concept of true impartiality in reality, just in theory. With the relevant caveats, the veneer of impartiality could still be retained by the international rating agencies within China, even though the lucrative approach is to toe the party line just the domestic agencies did. The one difference? The international agencies are unlikely to suffer the same consequences.

The future for Chinese domestic credit ratings is an interesting one that deserves attention.

 

Keywords – China, defaults, issuers, securities, @finregmatters 

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