China lays new policy groundwork for domestic credit rating industry

The policy is also a critical component in the ongoing opening-up of China’s financial markets.
Corporate Social Credit System China: Credit Rating Agencies

On November 29th, Chinese regulators released an interim version of a landmark policy aimed at updating the legal groundwork underpinning China’s nascent credit rating industry. The measures will go into effect December 26 this year.

The policy:

  • Defines which state bodies will regulate credit rating agencies (there are four: People’s Bank of China, Ministry of Finance, China Securities Regulatory Commission and the NDRC)
  • Sets out the legal requirements for establishing a new credit rating agency or altering the structure of an existing agency
  • Stipulates that agencies should strive for objectivity, transparency and (where appropriate) data privacy
  • Sets out checks and balances for maintaining data quality and preventing ratings fraud
  • Sets out legal liabilities and penalties for violating credit rating statutes

The policy is also a critical component in the ongoing opening-up of China’s financial markets, and includes measures allowing foreign rating agencies to freely compete with domestic counterparts.

Some context: In January this year, Standard & Poor’s was the first wholly foreign-owned (non-joint-venture) credit rating agency to enter China. Prior to 2019, only joint ventures were allowed.

The overlap between the financial credit rating industry and the social credit system is a little difficult to untangle, but basically, the interplay happens in two primary ways:

  1. There is a possibility that financial credit rating agencies will use the government’s corporate social credit data as a component of their ratings
  2. This policy (Article 7) also specifies that credit rating agencies themselves, and senior managers at those agencies, will be regulated through the corporate social credit system.

Get smart: China’s credit rating industry wants to compete internationally, but it’s got a long, long way to go before it’s ready for export.

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