China urged to revamp rating, credit guarantee systems

By (Agencies)
Updated: 2009-03-03 11:49

China needs new rules to strengthen its supervision of the country's rating and credit guarantee systems, said a top Chinese banker, describing the current situation as "disorderly and messy".

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Many ratings and loan guarantee companies in China operate in an opaque and unprofessional way due to a lack of industry standards and adequate regulatory supervision, said Ma Weihua, president of China Merchants Bank, the country's sixth-largest commercial lender.

Investors are losing confidence in rating results as credibility of rating firms is now in doubt, said Ma, a delegate of China's top political advisory body, in a proposal he plans to submit during the body's annual meeting in Beijing this week.

"Through uniform standard and supervision, rating and credit guarantee firms that cannot meet regulatory requirement should be forced to exit the business," Ma said in his proposal on Monday.

"To those rating and credit guarantee companies whose operations and services breach laws, they should be punished as a warning example to other firms," Ma said.

Ratings agencies assess the credit worthiness of companies, assigning ratings which can affect their cost of borrowing and ability to attract equity investment.

As of 2007, China had around 100 rating agencies, which often worked closely with banks and credit guarantee firms, according to local media reports.

The global credit ratings industry is dominated by Moody's Corp, Standard & Poor's and Fimalac SA's Fitch Ratings. The agencies have been criticized for not doing enough due diligence before assigning top ratings to securities that later deteriorated in value.

Credit guarantee firms often provide loan guarantees and advisory services to small and mid-sized enterprises and sometimes individual customers.

China has 3,366 credit guarantee companies with registered capital of less than 30 million yuan ($4.39 million) each on average at the end of 2006, Ma said in his proposal.

In late 2008, Chinese media widely reported an accounting fraud at China Orienwise Ltd, a once-highflying credit guarantee firm.

China Orienwise's foreign investors include Carlyle Group, Citigroup Inc, Asian Development Bank and an investment arm of General Electric Co.

Ma cited China Orienwise as "a typical bad example" in the country's credit guarantee firms in his proposal.

Ma blamed industry problems similar to China Orienwise's fraud on a lack of industry standards and greed for business benefits, which led some credit guarantee firms to make illegal high-yield private lending and risky investments in speculative sectors such as secondary stock markets and properties.

Ma urged the government to set up a new committee to regulate the rating business, which he regards as a key contributor to the global financial crisis, and China also needs new and uniform rules to strengthen control of its credit guarantee services.

Currently, at least five government agencies including the central bank, finance ministry, banking, securities and insurance regulators all have power to supervise rating and credit guarantee firms. But a lack of clarity and coordination makes supervision inefficient and limited, said Ma.
 
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