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Fitch entry into China bond market seen helping to improve rating practices

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Fitch entry into China bond market seen helping to improve rating practices

Fitch Ratings Ltd.'s entry into the Chinese interbank bond market as the second wholly foreign-owned credit rating agency in the country is a step toward increasing transparency and governance throughout corporate China and boosting best practices within the nation's ratings industry, experts say.

The U.S.-based rating agency on May 14 said unit Fitch (China) Bohua Credit Ratings Ltd. received approval to operate in the country from the People's Bank of China and the National Association of Financial Market Institutional Investors. Under the terms of its new license, the unit is able to only issue ratings on banks, nonbank financial institutions and insurers, as well as their securities and structured finance bonds in the interbank market.

The approval comes as China is easing restrictions on foreign access to its financial markets and is part of plans under the first phase of the U.S.-China trade agreement. S&P Global Inc. was the first U.S. credit rating company to receive regulatory approval to establish a wholly owned unit in China in January 2019.

"Fitch's entry in rating Chinese onshore yuan bonds will provide considerably more transparency to China's bond markets, encouraging domestic rating agencies to align their rating processes to that of global best-practice," Benjamin Quinlan, CEO of consulting firm Quinlan & Associates, told S&P Global Market Intelligence.

Quinlan added that the move "will serve as a confidence boost to foreign fund managers looking for exposure to Chinese corporate credit in their portfolios. This should bode well for capital inflows into mainland China." It will also provide global investors with a "more standardized anchor point" to evaluate corporate credit risk, he said, citing differences in rating methodologies between China and the rest of the world.

S&P Global's China wholly owned unit has rated eight onshore bonds since it secured its license. Unlike Fitch, S&P Global's license allows it to also rate non-financial corporates in the country.

"We see continuing efforts from the Chinese government to open up its domestic capital market and attract global investors," a spokesperson for S&P Global Ratings said.

Moody's Corp., meanwhile, reportedly signed a framework agreement in March 2019 to increase its stake in China Chengxin International Credit Rating Co. Ltd. to more than 50% from 30%. But on May 15, Moody's confirmed with S&P Global Market Intelligence that its stake in China Chengxin currently is 30%.

"We look forward to continuing to contribute constructively to China's sustainable growth and the further development of its capital markets," the company said in an email.

Analysts have previously said China's credit rating industry downplays risks and assigns favorable ratings for local issuers.

"Allowing independent foreign rating agencies to give their opinion on local financial instruments is important for credibility," said Song Seng Wun, an analyst with CIMB Private Bank.

Currently four Chinese rating agencies — China Chengxin, China Lianhe Credit Rating Co., Ltd. Dagong Global Credit Rating Co., Ltd. and Shanghai Brilliance Credit Rating & Investors Service Co. Ltd. — dominate the domestic market.

Among them, Dagong Global resumed operations in November 2019 after Chinese authorities ordered it to suspend rating services in August 2018 when it was found that it allegedly charged bond issuers high fees for consultation services in exchange for providing favorable ratings.