Ratings Mar 05

Ratings agencies must fight conflicts of interest

Rankings firms have been ordered to adhere to more than 30 new guidelines

Rating agencies get new guidelines
Headquarters of the People's Bank of China in Beijing. Financial regulators have set new rules for ratings agencies after large issues of local government bonds to help alleviate impacts from the coronavirus crisis. Photo: AFP / Mark Ralston

(ATF) – The China Bond Association and the China Debt Association tightened rules on March 3 in regard to ratings agencies, notably those that work on local government bonds.

A series of laws were enacted and will have immediate effect. Credit agencies have been ordered to adhere to about 32 new guidelines.

One of the key points among the guidelines is that credit ratings agencies should avoid conflicts of interest in setting the equity structure, rating business activities and salary rewards for ratings agencies' employees.

Soliciting business via high-level, lower-than-reasonable costs, or slandering peers, or transmitting or accepting improper benefits such as 'gift money' or rebates, is forbidden.

The new measures were backed by the State Council.

The move comes after some 12,223 billion yuan ($1.75 trillion) in local government bonds were issued in January and February this year in a bid to alleviate the impact of the coronavirus outbreak. 

“Self-Discipline"

The China National Debt Association issued "Guidelines for the Self-Regulation of Credit Rating Business of Local Government Bonds". To be accredited for this work ratings agencies must join the China Bond Association.

These moves include regulations such as interim measures and relevant regulations on local government bond issuance.

They aim to strengthen the "self-discipline" of credit ratings agencies dealing with local government bonds and further regulate the bond ratings business, according to the "Budget Law of the People's Republic of China", "Opinions of the State Council on Strengthening Local Government Debt Management", and "Credit Rating Industry Management" Laws. 

The moves aim to further standardize the local government bond credit rating business, according to the "People's Republic of China Budget Law", "State Council's Opinion on Strengthening Local Government Debt Management", "Interim Measures for the Management of Credit Rating Industry" and other laws on such bonds.

The China National Debt Association has researched and formulated "Guidelines for the Self-Regulatory Regulation of Local Government Bond Credit Rating Business." These were considered and adopted at the sixth session of the State Council and have now been published and implemented.

The term “local government bonds” refers to stipulations of the provinces, autonomous regions, and municipalities directly under the central government.

It includes municipal governments that plan to issue bonds approved by the provincial government for public welfare projects in accordance with the law. These governments must repay the principal and interest of the bonds within a certain period.

In order to comply, rating firms will need to provide all relevant data such as credit rating methods, rating models, and key assumptions of local government bonds to be allowed to join the China Bond Association.