CORRECTED-China warns of risks of inflated credit ratings amid bond defaults

(Corrects name of company in 9th paragraph to China Lianhe Credit Rating Co from United Credit Ratings Co Ltd)

SHANGHAI, Dec 4 (Reuters) - China’s interbank bond market regulator has warned of the risk of inflated credit ratings and widespread industry problems following a review, after defaults by highly rated state-owned enterprises triggered market panic.

“(We have) noticed that examples of specific rating institutions’ upgrades of issuer ratings are clearly above the industry average, and rating inflation and other potential risks exist,” the National Association of Financial Market Institutional Investors (NAFMII) said in a statement dated Nov. 30 and posted on its website on Thursday evening.

The vast majority of Chinese corporate bonds are issued by domestic firms boasting ratings of AA or higher, implying little default risk and giving little guidance on pricing. Investors say recent defaults of AAA-rated state firms has undermined faith in even the nominally safest ratings.

NAFMII, a self-regulatory industry body under the purview of the People’s Bank of China (PBOC), said its industry summary had discovered shortcomings at a number of firms, including rating models and databases in need of improvement, poor execution of rating business systems, insufficient quality control of rating projects and incomplete filing information.

The summary considered 10 rating agencies, including domestic firms and the wholly owned China subsidiaries of international rating firms S&P Global Inc and Fitch Ratings Ltd.

NAFMII said that it found that of 89 rating adjustments made during the third quarter, 54 were upgrades and only 35 were downgrades.

It singled out one firm, Dagong Global Credit Rating Co Ltd, which upgraded 17 issuers over the period, more than any other agency. Dagong also topped the league in upgrades for issuers who had changed rating agencies, with 13 upgrades.

Dagong Global Credit Rating did not immediately respond to Reuters’ request for comment.

“Unlike in the U.S. and Europe, the central contradiction in China’s ratings is the lack of industry credibility and low market recognition. In the absence of brand credibility, the unscientific use of rating results and fierce industry competition have indirectly accelerated rating inflation,” China Lianhe Credit Rating Co Ltd said in a statement.

A string of high-profile defaults by highly rated state-owned enterprises shook China’s corporate bond market in November, heightening speculation that Beijing is resuming a long-standing campaign against excessive financial leverage. (Reporting by Andrew Galbraith and Samuel Shen; Editing by Kim Coghill)