The Chinese bond market may finally have to get to grips with its ABCs after the government announced that foreign credit rating agencies have been given permission to rate domestic bond issues. The move came on the same day China launched its Bond Connect scheme, which allows foreign investors to directly purchase bonds – mainly via qualified institutions in Hong Kong – without restrictions for the first time.
The three international raters – Fitch, Moody’s and Standard & Poors – have long been lobbying China to deregulate the local rating industry. The breakthrough came in May when Beijing agreed to open its market to US credit rating agencies and credit card firms, as well as resume imports of American beef.
Moody’s was the first agency to get limited China exposure, when in 2006 it purchased a 49% stake in China Chengxin. The latter is now the country’s largest domestic rating agency, although the top five of the country’s eight major agencies all have market shares of between 15% and 19%. (Moody’s current stake in Chengxin is 30% after a corporate reorganisation). Fitch entered two years later when it purchased a 49% stake in China Lianhe and S&P followed by setting up a partnership agreement with Shanghai Brilliance.
None of the three have publicly stated whether they intend to set up independently, or try to buy a controlling stake in their existing joint ventures.
The government’s move has been broadly welcomed by the Chinese press, which believes it will bring greater transparency and add discipline to the murky depths of corporate disclosure. The Economic Observer describes it as a win-win situation, which will help speed up renminbi internationalisation too. But it adds the international agencies, “will have to adapt to the local market not the other way round”. Its argument is based on the fact that while local raters have increasingly adopted international norms such as the A to C rating scale, they have proved less adept at assigning ratings towards the lower end of the rung.
It remains unclear how welcome negative opinions will be in a country with a history of being riled when its sovereign rating is downgraded. Hong Kong’s South China Morning Post quotes Hu Xingdou from Beijing’s Institute of Technology who says, “Many people are still immature in the face of something that is not a song of praise.”
One frequent criticism aimed at the Chinese rating agencies is their tendency to assign top ratings to all and sundry. The government’s previous policy of bailing out troubled firms partly justified this stance since it effectively placed an implicit government guarantee over the entire market.
Wind, a local financial data provider, indicates that roughly half the country’s domestic bond issues still carry a triple-A rating at a time when the government is starting to let companies fail. As Pimco fund manager Luke Spajic told the Financial Times, “The ultimate test will come when the local and foreign agencies end up having vastly divergent views on credits and we see who called it right.”
One agency that may not be happy with the move is Dagong Global, which has built up an international footprint and often refers to the big three as ‘Western’ rather than international agencies. Dagong is probably best known internationally for downgrading the US sovereign rating to single-A: a level, which puts it on a par with South Africa.
Dagong believes China’s voice provides an important counterweight in a global market where the three rating agencies are often criticised for being slow to respond to crises and have political biases of their own. Founder Guan Jianzhong told the SCMP that the agencies “dramatically downgraded two thirds of their clients” during the global financial crisis. “It proved their rating methodology was wrong,” he says.
However, at an event held in Hong Kong in 2016 Dagong also made plain its differences from the American firms. In what some might see as a less than impartial approach Guan noted that “love for the country and humanity is at the root of our strategy” and added that the firm’s mission was “to shoulder the rating responsibility for the national rejuvenation”.
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