China opening for global rating agencies may lift debt credibility
Allowing greater participation of international rating agencies in China's credit market should help attract foreign investors
China has proposed to fully open its credit rating market to foreign participants, a move that was cheered by global rating agencies and could promote more accurate risk assessment and pricing in the mammoth corporate debt market.
The Ministry of Commerce (MOFCOM) and the National Development and Reform Commission (NDRC) – the government’s top planning agency – have jointly published draft foreign investment guidelines aimed at removing restrictions on credit investigation and ratings services.
The government’s foreign investment catalog for 2015 restricted foreign investment into credit investigations and ratings services. At present, global rating agencies can only have minority stakes in joint-venture operations in China.
Allowing greater participation of international rating agencies in China’s credit market should help attract foreign investors to China’s US$7 trillion bond market.
Even though China opened up its onshore bond market this year, foreigners have been reluctant to dip in, given wariness about the credit ratings issued by the domestic ratings agencies that dominate the segment.
And given the concern about the quality of domestic ratings, global fund managers have been reluctant to allocate more capital to China, especially as bond defaults begin to add up.
China has seen a steady increase in bond defaults since its first bond failure in 2014. According to Nomura, defaults have exceeded 20 billion yuan (US$2.91 billion) this year, up from 15.4 billion last year and 1.8 billion yuan in 2014.
International rating agencies welcomed the joint statement saying restrictions on them would be liberalized. Still, the details of how exactly the sector will be changed were not published and MOFCOM did not reply to requests to elaborate on its policies.
“We are encouraged by the removal of credit rating agencies from the proposed list of foreign ownership restrictions and the direction that the regulations and regulators are moving,” said Kwong Li, head of Greater China for Fitch Ratings.
“However, we would still need to see how the other regulators, that also have oversight on credit rating agencies in China, will respond,” he added.
Moody’s Investors Service, which operates in China as a 49% shareholder in China Chengxin International Credit Rating Co, said that the firm was “studying” the implications of the proposed rules changes.
“As a general matter, we are encouraged by the policies of the Chinese government to open the Chinese capital markets, including the CRA industry,” Moody’s said.