We observe 180 upgrades but two downgrades among 657 Chinese banks during 2015-2017. Bank fundamentals were not improved after the upgrades, while the rating standards loosen over time, indicating rating inflation. Except for the banks being upgraded to AA+or above that gained significant regulatory benefits, the credit spreads and financing gaps of the interbank negotiable certificate of deposits (INCDs) did notduly decrease after the upgrades. Conversely, the upgrades accompanied by rating agency switches, where ratings were more likely to be shopped, were followed by more negative market reactions. We find that rating-contingent regulations give rise to various agency problems; investors are able to discover credit information, but appear to “naively” accept upgrading for regulatory be nefits rather than credit quality. 

Keywords: Credit Rating, upgrading, rating effectiveness, rating-contingent regulation, naïve investor.
JEL: G21, G24, G28​