Abstract: The reputation mechanism which can generate the pressure of ‘Survival of the Fittest’, is an important restriction to behavior of credit rating agencies. It is China's credit rating system which sacrifices the substance for the shadow and immature rating market, which not only hindered the formation of reputation mechanism but also provided space for CRAs to offer higher ratings. Based on above, this paper built up a model of equilibrium in rating conspiring market and proved that the market competition in credit rating market of China would lower the quality of credit ratings. And by taking Peng Yuan's entry into the credit rating market of quasi-municipal bond as a natural experiment, we found empirical evidences. Analysis shows that the vicious competition mechanism of ‘bad money drives out good money’ has dominated the credit rating industry. For suggestions, the Chinese government should reshape the restriction mechanisms for CRAs and built up a rating market dominated with reputation mechanism in the long run. As in short run, the government needs to enhance supervision and make a control on the market competition.

Key words: market competition, credit rating, reputation mechanism, quality of credit ratings