China’s securities regulator has issued a warning to the local subsidiary of S&P Global Inc. for failing to comply with rules on consistency and information disclosure, as authorities step up efforts to curb inflated credit ratings.
The Beijing bureau of the China Securities Regulatory Commission released the warning letter on Tuesday, ordering S&P Ratings China Co. Ltd. to immediately carry out a comprehensive rectification. The regulator instructed the firm to strengthen quality control in its rating operations and improve the standardization of information disclosure.
In response, a spokesperson for S&P China told Caixin that the company would “take the necessary measures to rectify the relevant issues and ensure compliance with regulatory requirements.”
This is the second regulatory penalty the U.S. ratings agency has received since it was officially approved in 2019 to conduct rating business in China. Last year, regulators fined the company about 2 million yuan ($281,000) for similar violations.
Both cases involved a failure to follow the principle of consistency, according to regulatory announcements. Under the rule, agencies must apply the same rating standards and procedures when rating similar entities or conducting follow-up ratings. Any adjustments to the standards or procedures must be fully disclosed.
In recent years, S&P China has drawn attention by raising the credit ratings of some local government financing vehicles (LGFVs) to AAA. Last year, it assigned a AAA issuer rating to four municipal-level LGFVs — its first ratings for the companies — while other agencies had previously rated them lower at AA+.
Out of 20 grades awarded by Chinese ratings companies, the three highest are AA, AA+, and AAA, reflecting issuers’ strong capacity to meet their debt obligations and a very low default risk.
At the time, a person from S&P China told Caixin that the higher ratings for those LGFVs were based on their updated methodology introduced at the end of 2023. The person said the company applies the same framework that S&P uses globally, but with some localized adjustments. Key considerations include China’s low bond default rate in its bond market, strict government control over state-owned enterprise debt, and the ongoing local government debt-reduction campaign.
However, some industry insiders Caixin spoke to said S&P China has been “loosening standards” in recent years. This has intensified competition among China’s rating agencies, a person from a Chinese credit rating company told Caixin.
Other industry figures told Caixin that S&P China has been operating at a loss since entering China, and that fierce competition pressures the firm to use higher ratings to attract clients.
China’s credit ratings industry has long relied on an issuer-pays model, in which bond issuers pay agencies to grade their creditworthiness. The model tends to skew outcomes in favor of the issuers paying for the service, compromising the independence of the ratings and the agency’s credibility, Caixin reported previously.
The industry is looking to shift to a buyer-funded model, under which investors, rather than issuers, would pay. This comes as investors are railing against flattering reports and inflated credit ratings. The approach, being explored by leading rating agencies, may help reduce the race to assign higher ratings in order to win clients, shifting the focus toward report quality and investor trust, people from the industry previously told Caixin.
Contact reporter Qing Na (qingna@caixin.com) and editor Jonathan Breen (jonathanbreen@caixin.com)
