Spread the Blame, China

Of the 5,398 notes rated by Dagong, only six were below investment grade.

News the China Securities Regulatory Commission is investigating underwriters of bonds that later went into default begs the question of when authorities will start looking at rating companies. If bankers have to take the blame for not looking carefully enough into issuers' finances, then it only seems fair the credit scorers that gave them investment-grade seals should be scrutinized as well.

It's not like credit-rating firms in the West have a perfect history, but what happens in China looks a bit more excessive. Of the 5,398 domestic notes rated by Dagong, China's biggest credit scorer, only six were below investment grade, data compiled by Bloomberg show. Three have already defaulted.

Such Quality, Really

About 92 percent of Dagong's ratings, 94 percent of Lianhe's and 99 percent of Chengxin's place among the four highest scores

Source: Bloomberg

How fast companies drop from investment grade to default is another sign things are unique in the Middle Kingdom. 1  Yabang Investment Holding Group, which missed obligations in February, was given a rating of AA- by Dagong when it sold the securities a year earlier. It's extremely rare that a company rated investment grade by Fitch, Moody's or S&P would move so swiftly from top class to skipping a payment. 

That's not to say bankers are exempt from doing proper due diligence before they go selling debentures of companies they know won't be able to meet their liabilities. Even in the U.S., the deepest and most mature bond market in the world, underwriters sell debt for firms that are near, or even in, bankruptcy. But these notes usually come with lengthy risk disclaimers, and ratings to match.

As China begins to open its debt market to international investors, it badly needs a credit-scoring system more reflective of companies' actual financial strength. Nowhere are nine out of 10 bonds investment grade, no matter how much Beijing would like.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. Dagong rates China AAA and gives the U.S. an equivalent score of A-.

To contact the author of this story:
Christopher Langner in Singapore at clangner@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net

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