China to open up to credit rating firms

Foreign companies must adjust to domestic market: experts

China's decision to allow wholly foreign-owned financial firms to provide credit ratings in the country will help guide the development of the domestic credit rating industry, but these foreign companies will need to adopt a rating system that reflects China's market situation, experts said.

The comments came after Chinese Vice Finance Minister Zhu Guangyao revealed the progress of the 100-day action plan for trade talks with the U.S. on May 12. One result is that China will allow wholly foreign-owned financial services firms to provide credit ratings in the domestic market by July 16, the Xinhua News Agency reported.

This means that companies like Standard & Poor's (S&P) and Moody's - which at the moment can only assess offshore bonds issued overseas by domestic companies - will be able to operate in China to assess onshore bonds issued by domestic companies.

"We have not had a chance to fully review the China-U.S. 100-day action plan, but we are pleased with its direction. We are encouraged by the policies of the Chinese government to open the Chinese capital markets, including to the credit rating industry," Moody's said in an official statement sent to the Global Times on Tuesday.

"China is an important market for Fitch Ratings Inc and the issuers we rate. We are encouraged by this news and look forward to more details emerging," a spokesman from Fitch told the Global Times on Wednesday.

The introduction of foreign credit rating agencies will push domestic credit rating firms to improve their management and get ready for more competition, while also strengthening investors' confidence in the ratings, Huo Zhihui, deputy director of the Rating Technology Department of China Bond Rating Co, told the Global Times on Wednesday.

Currently, the ratings of some bonds issued in China are a little high, sending no early warning of a bond default and reducing investors' confidence in the ratings offered by some local firms, he said.

As of the end of 2016, more than half of the domestic bonds that are not due are rated AAA, the top level, the Financial Times reported in May, citing Shanghai-based financial data provider Wind.

Foreign credit rating companies have advantages such as mature rating models and professional standards, but their understanding of the Chinese market is still insufficient, Qiao Baoyun, a professor with the Beijing-based Central University of Finance and Economics, told the Global Times on Wednesday.

"Domestic credit rating companies have some shortcomings in areas such as management. But with increasing supervision and a more mature and transparent market, companies that can't provide valuable services will be sifted out," he said.

Introducing foreign-owned credit rating firms may not have that much influence on domestic investors' choice of bonds, Huo said.

"There is a recognized relationship between foreign credit rating firms' ratings and those of domestic firms, which will guide investors. For example, a BB bond rating by a foreign credit rating firm may be considered equal to an AA rating by a domestic firm," he explained.

The balance of outstanding bonds in the domestic bond market was 63.7 trillion yuan ($9.24 trillion) by the end of 2016, ranking No.3 in the world, according to a statement on the website of the People's Bank of China in February. The balance of corporate bonds reached 16.5 trillion yuan by the end of last year, ranking No.2 globally, it said.

Meanwhile, Moody's Investors Service on Wednesday downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

Slow market integration

Based on the expansion of big global credit rating agencies into other countries and regions like Japan, it will be difficult for foreign credit rating firms to integrate into the local rating system in the short term, due to the difference in credit rating standards, Huo said.

Foreign credit rating firms need to adjust their system according to China's market and system conditions, experts noted.

"Foreign credit rating firms have to understand the Chinese market to provide clearer and more useful information for investors… If they stick to a system that does not reflect China's market, they will soon be abandoned by the market," Qiao said.

Huo said that foreign credit rating companies may enter the Chinese market by providing financial services for domestic investors instead of directly assessing issuers' bonds.

They might have no competitive advantage in the Chinese market, as they charge high and give low credit ratings, he said.