Banking & Finance

Time to give credit

S&P finally gets a licence to rate local debt in China – and take on Dagong


Dagong’s Guan: a proud patriot

Downgrading its credit rating for US government debt to a level barely above junk won Dagong Global more headlines than credibility when it announced its decision last January. Bemused analysts pointed out this was the same firm that had awarded a higher rating to the now-defunct Ministry of Railways than to the Chinese government – a similarly odd call.

Not that Dagong’s chairman Guan Jianzhong has ever been bashful about explaining his approach. He outlined the methodology in his 2016 pamphlet Leading the Future of the Global Rating Industry. “Love for the country and humanity is at the root of our strategy…” it explained. “The fruit of the patriotism directly beneficial to the whole human society embodies that Dagong’s rating services are non-sovereign and universal.”

All very clear. But patriotic fervour hasn’t guaranteed Dagong’s commercial success: the agency was even hit with a year’s ban on its taking on new ratings last August for providing inaccurate information to regulators and charging its clients excessive fees (see WiC421).

Guan warned at the time that the punishment might engender “systemic risk” across the financial sector but more damaging revelations have followed, including allegations from Caixin Weekly that Dagong required at least 26 issuers to purchase its consulting software before it would improve their ratings.

The software doesn’t deliver much, Caixin reported, but it didn’t come cheap, costing Rmb9.7 million ($1.4 million) upfront plus an annual service fee of about Rmb800,000.

More bad news has come Guan’s way this year with regulators finally awarding S&P Global Ratings a licence to compete with Dagong and its ilk in its home market.

The milestone is the first time a company wholly-owned by an international credit rating firm has been able to rate domestic Chinese bonds. S&P got its clearance late last month with final approval from the People’s Bank of China (PBoC). The US firm is now licenced to conduct local credit reviews.

The central bank’s statement did not mention S&P’s peers Moody’s or Fitch, although local media reckon that their own approvals should not be far behind.

The Chinese newspapers described S&P’s debut as one of several olive branches from Beijing in a bid to improve the mood at the ongoing trade talks with Washington. But sympathy for local players like Dagong is in short supply and regulators will be hoping that the shake-up spurs better performance.

“The entry of S&P will promote transformation and upgrading of the local credit rating sector, as there has been a lot of controversy about domestic ratings being ‘watered down’ and ‘inflated’,” admitted the Global Times, which typically champions the local team. It noted that more than 95% of Dagong’s ratings were at the ‘high’ investment grade level.

S&P is likely to target Chinese issuers which it deems to be of the highest creditworthiness – as they are more likely to attract buying interest from international bond funds, Securities Times suggests.

Granting wider access to the domestic credit rating market is also seen as a necessary move as China looks for more foreign investment in the domestic debt market – which, in turn, is a vital step in promoting the global use of the yuan, the newspaper added.

By the end of 2018, foreign investors owned about Rmb1.7 trillion of local debt – but that represents only 2.3% of the Chinese bond market.

That proportion is set to increase once more foreign issuers raise capital through the renminbi-denominated Panda bond market, Securities Times also predicts.

International flows into the local debt market ought to pick up too as the Bond Connect scheme links up with more foreign bourses and Chinese bonds receive a higher weighting in global fixed income indices (see WiC429).

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