MOF urged to assign credit rating agencies

The Ministry of Finance (MOF) should choose and pay for independent credit rating agencies for local governments which will be allowed to issue bonds for urbanization, in order to avoid a conflict of interest, a leading Chinese privately owned credit rating agency said Tuesday.

Independent credit ratings for local governments' municipal bonds is the key to assess underlying risks, Guan Jianzhong, president of Dagong Global Credit Rating Co Ltd, said at a press conference on Tuesday.

Local governments will be allowed to issue municipal bonds to fuel the urbanization program, which is aimed at narrowing the gap of the country's urban rich and rural poor, according to a national New Urbanization Plan (2014-20) released by the State Council on March 16.

Local governments are currently banned from directly issuing bonds, which forces them to mostly rely on bank loans and bonds issued by local government financing vehicles (LGFVs).

Unlike bonds issued by local government backed corporations, municipal bonds are issued directly by local governments and require more transparency of information disclosure.

As bond issuers, local governments will tend to pay for rating agencies which give its bond issuance a higher credit rating, and rating agencies may give ratings favorable to the bond issuer in order to secure the business, Guan said.

To avoid the conflict of interest, the MOF can act as a supervisor and prevent the bond issuers, in this case, local governments, from directly dealing with rating agencies, Guan told the Global Times in an interview on Tuesday.

"The MOF can assign the credit rating agencies for local governments' bond issuing, and pay the rating agency for the service rather than have the local governments pay for its own credit rating," he said.

The MOF can even appoint dual rating agencies for the same local government bond, so that the market will tell later which rating agency has the most accurate rating, as competition drives better rating techniques, Guan noted.

China has already witnessed mounting local government debt of 17.9 trillion yuan ($2.93 trillion) by the end of June 2013, up 67 percent from 2010, according to the National Audit Office. China's provinces show varying degrees of credit risk from moderate to high, and exposures to refinancing risk and to less transparent forms of borrowing vary, Moody's Investors Service wrote in a research report on Tuesday.

"Such a situation - which includes a greater reliance on the opaque shadow banking market - reinforces our view of the need for a more transparent local government bond market," the report stated.

The money needed for urbanization up to 2020 is estimated to amount to 20 trillion yuan including municipal bonds and bonds issued by LGFVs, Zhang Yingjie, deputy general manager of R&D Department at China Chengxin International Credit Rating Co (CCXI), told the Global Times on Tuesday.

CCXI, another major domestic credit rating agency, is backed by Moody's Investors Service which acquired a 49 percent stake in the firm in 2006.

A license is likely needed to rate municipal bonds, Zhang said. Currently a rating agency must get a license to engage in rating bonds issued at interbank market and stock exchanges for listed companies.

If the MOF is to pay the service fees for credit rating agencies for municipal bond rating, details will have to be worked out such as how much it will charge the local governments for the assigned rating agency, he said.

Although no local governments have defaulted on their loans so far, some Chinese companies already have done so. The recent bond default of Shanghai Chaori Solar Energy Science and Technology Co Ltd in early March sounded a warning for rating agencies, which drives the rating industry to improve methodology to better assess the risks of bonds, Zhang said.

Shenzhen-headquartered Pengyuan Credit Rating received a warning from the securities regulator as early as August 2013 for failing to downgrade Shanghai Chaori's credit rating in a timely manner amid major changes in the solar power maker's business environment and firm's financial status, according to media reports.