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Markets

China regulator suspends Moody's Chinese JV over Yongcheng default

  • Earlier this month, NAFMII warned that there was a risk of inflated credit ratings in China, where the vast majority of corporate bonds are rated AA or higher, implying little default risk and giving little guidance on pricing.
Published December 30, 2020
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SHANGHAI/BEIJING: Chinese regulators on Tuesday said they have suspended the credit rating business of Moody's Chinese joint venture over its role in the default of a state-owned coal miner that stunned China's bond market last month.

The National Association of Financial Market Institutional Investors (NAFMII), which regulates China's interbank bond market, said China Chengxin International Credit Rating Co (CCXI) violated rules and its credit rating business will be suspended for three months.

CCXI is China's biggest credit rating agency and is 30% owned by Moody's Investors Service, according to its website. Moody's did not immediately respond to a request for comment.

CCXI was probed after its client, Yongcheng Coal & Electricity Holding Group Co, defaulted on a 1 billion yuan ($153.17 million) bond on Nov. 10, just weeks after it sold fresh debt, sending shockwaves across China's bond market.

CCXI, which gave triple-A rating to the bonds at the time of default, had failed to conduct on-site due diligence on Yongcheng or adequately disclose risks, NAFMII said on Tuesday, urging the credit rating agency to take corrective measures.

During the suspension, CCXI is not allowed to conduct new rating business for debt financing instruments.

Chinese regulators have vowed zero tolerance toward wrongdoing in financial markets as they seek to repair investor confidence following a series of high-profile defaults by state firms, including Huachen Auto Group Holdings Co and Tsinghua Unigroup, in recent months.

Earlier this month, NAFMII warned that there was a risk of inflated credit ratings in China, where the vast majority of corporate bonds are rated AA or higher, implying little default risk and giving little guidance on pricing.

NAFMII also launched investigations into Yongcheng's underwriting banks and its accounting firm. It also threatened to sanction Haitong Securities, saying the brokerage was suspected of facilitating the illegal issuance of bonds by Yongcheng Coal, and of manipulating the market.

NAFMII, a self-regulatory industry body under the purview of the People's Bank of China (PBOC), suspended some business of Dagong Global Credit Rating Co Ltd in 2018 after the agency violated regulations.

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