COMPETITION among China’s credit rating agencies is intensifying, leading to a slide in standards reminiscent of what happened in the United States before the financial crisis, according to Dagong Global Credit Rating Co.

    China’s onshore bond market last week saw its first default, with Shanghai Chaori Solar Energy Science & Technology Co. saying Friday it could not be able to make an 89.8 million yuan (US$14.7 million) interest payment due that day.

    The distressed solar cell maker sold 1 billion yuan in five-year debt in March 2012 and the notes were rated AA, the fourth-highest investment grade, by Pengyuan Credit Rating Co. when they were issued. The debt was subsequently downgraded twice, most recently to BBB plus in April 2013.

    “China’s rating system has problems similar to those in the United States in 2008,” Guan Jianzhong, chairman of Beijing-based Dagong, said yesterday. “There’s cut-throat competition and it’s not about who accurately evaluates the risks, but comes down to prices and ratings.”

    The U.S. Financial Crisis Inquiry Commission said in 2011 that inflated credit grades were partly to blame for the worst downturn since the Great Depression, as rating companies lowered standards to win business amid a housing boom that fueled issuance of mortgage-backed bonds.

    China ended in 2012 a four-year ban on sales of asset-backed securities and credit assessments are of growing importance as market forces play a greater role in pricing risk in the country’s US$4.2 trillion bond market.

    A default by Chaori Solar may prompt investors to reassess credit risks as they did after the U.S. securities firm was rescued in 2008, said Bank of America Corp. last week in a report.

    A missed payment by Chaori Solar “won’t pose systemic risks to China’s bond market, but it’s time to think about reforms in improving the rating system,” Guan said. Credit rating agencies should be made responsible for the grades they award companies and provide more details on how they come up with their assessments, he said.

    (SD-Agencies)