Moody's China red flag report under scrutiny by HK regulator
6:52am EDT
By Rachel Armstrong
SINGAPORE (Reuters) - Rating agency Moody's (MCO.N: Quote, Profile, Research, Stock Buzz) may face regulatory action in Hong Kong for publishing a report on corporate governance at Chinese companies that sent some of their share and bond prices spiraling.
Moody's published a July 11 report picking out potential weak spots in some Chinese companies' corporate governance and accounting practices.
The report caused a sharp fall in the stock and debt prices of some Hong Kong-listed companies it flagged, including West China Cement (2233.HK: Quote, Profile, Research, Stock Buzz) whose shares slumped 17 percent before rebounding.
That prompted stinging criticism from some market analysts who debated the agency's risk framework, especially since at least one of the so-called "red flags" was publicly denied by one of the companies. The Moody's note also grabbed the attention of the city's market regulator, the Securities and Futures Commission.
"We are aware of the Moody's report and are looking into it," the SFC said in a statement to Reuters on Wednesday.
Fitch, a Moody's competitor, released a similar report on Monday, though it caused less of a market reaction.
Credit rating agencies in Hong Kong only came under the regulatory oversight of the SFC on June 1 this year, having previously been unregulated. They now have to follow a code of conduct which includes requirements that they deal with investors and the issuers they rate "honestly and fairly."
"What the SFC will be looking at will include what methodology the agency applied, how it works, whether it is rigorous, systematic and independently verifiable," said a Hong Kong securities lawyer.
"They will want to make sure it's not some form of arbitrary opinion without a solid research foundation," said the lawyer, who did not want to be identified as his firm may become involved if the investigation progresses.
"We are not in an appropriate position to comment on this at the moment," said Eleanor Sheung, a Moody's spokeswoman.
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