China is taking credit ratings oversight up a notch. A Hangzhou court ordered Dagong Global Credit Rating to repay bondholders in a construction company that defaulted on over $200 million. The desire to crack down harder is understandable given a slew of unpaid debt by top-rated issuers. This sort of punishment, however, is unlikely to help the market much. The country’s non-performing and stressed assets hit $1.5 trillion in 2019, estimates consultancy PwC. In that context, the $15 trillion bond market has an important role to play helping refinance companies hammered by the pandemic, relieving state banks from doing all the heavy lifting. Chinese companies raised over $1.2 trillion from the domestic fixed income market in 2020, with the number of issues up 27% from 2019, Refinitiv data show. Unwarranted ratings don’t help, as occurred when Moody’s Chinese partner Chengxin assigned a triple-A score to a provincial coal miner that defaulted on a $150 million bond. That led to a three-month suspension for the agency, which should be a useful deterrent. Dagong, best known for downgrading the United States, is now being held partly responsible for repaying angry bondholders of Wuyang Construction for up to 10% of their claimed losses, Bloomberg reported this week. The allegation is that Wuyang falsified financial information, and Dagong slacked on due diligence. Underwriters, accountants and lawyers also may be on the hook. It’s tempting to make credit raters, which contributed to the 2008 global financial crisis, put skin in the game. Doing so would completely upend the business, forcing a significant rise in fees to compensate for the risk. In China especially, the industry has survived mostly by catering to issuers more than investors, selling ratings for access to a market where state-backed banks buy most corporate debt. Borrowers also would suffer. Only the safest government-owned behemoths would get rated, leaving opaque companies even less scrutinised. Many issuers would be stuck trying to roll over debt outside the bond market at an economically delicate moment. The alternative is foisting defaults onto bank balance sheets. There can be little doubt that credit ratings need improving, but the Hangzhou approach wouldn’t provide much of an upgrade.