July 27 (Bloomberg) -- Credit ratings assigned to yuan- denominated bonds issued on behalf of local governments in China are misleading and don’t reflect risks investors face, Dagong Global Credit Rating Co.’s chairman said.
Local government-backed borrowers shopped around for the best rankings from Chinese ratings companies, Dagong Chairman Guan Jianzhong said yesterday during a Bloomberg Television interview in Beijing.

Guan Jianzhong, chairman of Dagong Global Credit Rating Co. Ltd., works at his desk at the company's office in Beijing. Photographer: Nelson Ching/Bloomberg

“Whoever gives them a better rating gets the business,” he said. “Local governments are very powerful. The current system doesn’t reflect all the risks.”
Standard & Poor’s, Moody’s Investors Service and Fitch Ratings drew criticism in the U.S. from investors and officials including Financial Crisis Inquiry Chairman Phil Angelides for assigning top rankings to mortgage-linked securities that crashed when the U.S. housing market collapsed in 2007.

Guan Jianzhong, chairman of Dagong Global Credit Rating Co. Ltd., poses for a portrait at the company's office in Beijing. Photographer: Nelson Ching/Bloomberg

Local governments in China set up financing vehicles to fund projects such as highways and airports with bonds and loans, due to limits on their ability to directly borrow money.
There are concerns Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local infrastructure projects, according to a person with knowledge of data collected by regulator the China Banking Regulatory Commission. China this year restricted borrowing on concern money isn’t being used for viable projects.
Danger Signals
“This is very dangerous,” Guan said. “If you look at the financial crisis, it was caused by an accumulation of credit risks. When it gets to a certain point, then a crisis breaks out.”
While Dagong expects defaults on these bank loans, there won’t be a systemic risk to the banking system as regulation has improved, he said.
Beijing-based and privately owned Dagong gave China’s government a higher debt rating than the U.S., U.K. or Japan in a report covering 50 nations it published this month.
China’s two other big ratings agencies are tie-ups with international partners. China Chengxin International Credit Rating Co. is a joint venture with Moody’s Corp., and China Lianhe Credit Rating Co. is a joint venture partner with Fitch Ratings Ltd.
Dagong has applied to the Securities and Exchange Commission to start ratings coverage in the U.S. The firm expects a final SEC decision in September.
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It's buyer beward and buy at your own risk. With these Chinese rating agencies they are not regulated and the Balance Sheets are hard to interpret because Chinese accounting standards are very different from Western standards. That said, Moody's wasn't that much better but after the financial crisis, I believe they have revamped their rating system.

This is pretty much what happened in the US.    The rating agencies were effectively conflicted because they were being paid by the person seeking the rating for it bonds, not the investors.  So the rating agency cannot by definition be completely objective. They are swayed by the comments of the person paying the bill.  This has not been corrected eve after the financial crisis. .