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China debt crunch

Chinese regulator suspends rating agency over Yongcheng default

Moody's-backed Chengxin not allowed to score debt issues for 3 months

The failure of Yongcheng Coal & Electricity Holding Group to redeem a 1 billion yuan bond has helped touch off tremors in China's domestic debt market.    © AP

HONG KONG -- Chinese regulators on Tuesday suspended the country's largest credit rating agency for failures they said contributed to the default last month of state-owned Yongcheng Coal & Electricity Holding Group.

Yongcheng's failure to redeem the 1 billion yuan ($152.95 million) bond on Nov. 10, just weeks after a fresh debt sale, helped touch off tremors in China's domestic debt market, the world's second largest.

In reaction to the default and a series of other high-profile missed payments, Beijing has put a spotlight in recent days on the country's rating agencies which rarely have given a rating below AA+.

In its announcement on Tuesday, the National Association of Financial Market Institutional Investors, or NAFMII, which regulates the country's interbank bond market, said that it would suspend the debt rating business of China Chengxin International Credit Rating for three months for failures related to its assessment of Yongcheng.

It ordered the ratings agency to "carry out comprehensive and in-depth rectification in response to the problems exposed in this incident."

Chengxin had given its highest AAA rating on the defaulted bond. The regulator said Chengxin failed to conduct on-site due diligence or interviews of key managers at Yongcheng.

It also said the agency failed to check into delayed salary and debt payments by Yongcheng and its parent company. It noted failures in the agency's internal quality control mechanisms and compliance supervision.

The action on Chengxin comes days after the Central Commission for Discipline Inspection, China's graft-busting agency, released a video of two former executives of Golden Credit Rating in which they appeared to confess to taking bribes from the companies in exchange for higher scoring.

The China Securities Regulatory Commission has barred the agency from taking on new business for three months.

Moody's Investors Service owns a 30% stake in Chengxin, according to its latest annual report. Last year it initially sought to raise that to a majority interest before instead pursuing its own domestic ratings license in China. Rivals S&P Global Ratings and Fitch Ratings both recently have received domestic licenses.

Aside from Chengxin, NAFMII also is investigating the banks that underwrote Yongcheng's bonds and its accounting firm. It also has threatened to sanction Haitong Securities over its handling of Yongcheng issues.

After Yongcheng, Tsinghua Unigroup, an affiliate of Beijing's Tsinghua University, failed to repay a $450 million dollar bond and a 1.3 billion yuan local issue. Huachen Automotive Group Holdings, a state-run carmaker and parent of the local partner of BMW, also defaulted and later entered into bankruptcy protection.

Fashion group Shandong Ruyi Technology Group, once hailed as the "LVMH of China," missed the deadline on two domestic bonds -- a maturity and an interest payment -- in 24 hours.

Analysts and international ratings agencies forecast more pain ahead. In the offshore market, where Chinese companies borrow in foreign currencies, about $104 billion worth of bonds will mature in 2021, 40% more than this year.

Some 7.1 trillion yuan worth of bonds are due to mature in the domestic market, with Fitch warning that 1.15 trillion yuan of that relates to companies with excessive borrowings or weak balance sheets.

The specter of rising defaults is exposing the quality of ratings by Chinese agencies. Two-thirds of all bonds rated by domestic agencies -- including those from Tsinghua Unigroup and Yongcheng Coal at the time they defaulted -- have either a AAA or AA+ rating, while almost all have an investment grade rating.

A gap between the ratings issued by Chinese credit agencies and those of their Western peers is often apparent.

In the case of Shandong Ruyi, while both Moody's and S&P classified the company in the "junk" rating category all along, China's Dagong Global Credit Rating gave it AA+ until a downgrade to AA- in March.

Additional reporting by Kenji Kawase.

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