HONG KONG (Reuters) - Hong Kong's securities regulator said on Friday a Moody's Corp report questioning corporate governance at 49 Chinese firms was"shoddy" and "unprofessional" - a report the ratings agency said it stood by even though it contained errors.

The Securities and Futures Commission (SFC), citing internal Moody's emails, said articles critical of Chinese companies by international newspapers and research firms had prompted Moody's to "scrub" the list of Chinese companies whose credit it rated.

Credit ratings help determine a company's cost of borrowing and are used by fund managers to guide investment decisions.

"The work was shoddy, unprofessional and done in the manner that really doesn't befit a reputable rating agency that is being regulated," SFC counsel Ben Yu said at a hearing in the securities and futures appeals tribunal for Moody's appeal of a US$3 million penalty.

Moody's said there were some errors in its so-called red flags report in July 2011 and that they were not serious enough to warrant a HK$6 million ($774,213) fine - part of the penalty by the SFC, which said the mistakes were a serious breach of due diligence standards.

Moody's said the methodology of the report contained 12 input and mathematical errors. Its counsel, Adrian Huggins, told the tribunal "those errors did not render the whole red flags framework fundamentally flawed." "Errors did not have a material impact on overall accuracy of the report," Huggins said.

The SFC fine is the first disciplinary action taken against a credit rating agency since their activities became directly regulated by the SFC in June 2011. It could have major implications for the types of services credit rating firms are able to offer in the financial centre, analysts said.