China moved to tighten scrutiny over its credit rating business on Sunday, issuing draft rules aimed at bolstering an industry long blamed for inflating ratings in the country’s $4.4 trillion corporate bond market.
China’s credit rating agencies are urged to improve their credit rating models, strengthen corporate governance and bolster information disclosure, according to rules jointly published by five government agencies including the central bank and the finance ministry.
The rules are also designed to create a better eco-system in which bond issuers don’t interfere with credit rating decisions, investors rely on multiple sources of rating, and regulators lower the bar of credit rating required for some type of bond investors, said the People’s Bank of China in a statement on its website.
The rules will shift more burden on rating agencies, and “guide them to see reputation as the basis of their very existence”, according to the statement.
China has stepped up opening its giant bond market to foreign investors. Beijing has also deregulated the country’s credit rating market to global players such as S&P Global (NYSE:SPGI) Ratings and Fitch Ratings.
But bond credit rating in China has long been a source of complaint for investors.
Late last year, China’s bond regulator flagged the risk of inflated credit ratings and widespread rating industry shortcomings, after defaults by highly rated state-owned enterprises triggered market panic.
Rules published on Sunday urge rating agencies to boost consistency, accuracy, and timeliness of credit rating, and build a quality inspection system using default ratio at the core.
Rating agencies are also encouraged to install independent directors, and urged to take measures to avoid conflict of interest and strengthen internal control.
Government bodies that jointly published the rules also include the National Development & Reform Commission (NDRC), the China Securities Regulatory Commission (CSRC) and the China Banking and Insurance Regulatory Commission (CBIRC).
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