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China Bond-Rating Champ Unfazed by Foreign Competitor Threat

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  • China Chengxin says domestic firms will prove to have an edge
  • Local bond ratings tend to be higher than typical overseas

The world’s second-largest corporate bond market is opening up to foreign ratings companies, but that’s not fazing China’s local champion, which sees another case of overseas players foundering in a competitive mainland market.

After years of U.S. lobbying to open up financial services to Chinese competition, China agreed last month to allow foreign-owned firms to provide credit ratings in the country by July 16. That gives opportunities to S&P Global Ratings, Moody’s Investors Service and Fitch Ratings, which all welcomed the move. Up to now, they were limited to joint ventures.

China Chengxin International Credit Rating Co., in which Moody’s has a 30 percent stake, has the largest market share for rating securities in China’s $9 trillion bond market, and doesn’t see full overseas participation as a threat.

“We aren’t worried about the impact from the potential entrance of international rating companies,” Yan Yan, chairman of China Chengxin, said in an interview. “In the early days, the market may pay more attention to a more advanced methodology of international rating agencies, but after eight or 10 years, domestic firms will prove to have an edge.”

While some services companies have successfully planted themselves in China, including hotel operators such as Intercontinental Hotels Group Plc and Marriott International Inc., history is littered with examples of failure, from Inc. and eBay Inc. to Uber Technologies Inc.

Timing also could have been better for the foreign rating players, who will be given entry in the midst of a clampdown by Chinese regulators on leverage that’s roiled the bond market and scaled back issuance.

Still, the big three overseas companies have expressed keenness to build business in the world’s second-largest economy. And global investors seeking to buy domestic Chinese bonds that have become increasingly easier to purchase might be more comfortable with ratings from names with which they’re familiar.

S&P Global Ratings said last month it welcomes the commitment to open further China’s domestic market to international credit rating agencies. Moody’s Investors Service said it is pleased with the direction while Fitch Ratings said it’s “excited” by China’s move to allow foreign-owned companies to provide credit ratings. 

Among the advantages for local operators in the rating industry, Yan listed:

  • Domestic operators have a different rating scale for companies that typically give them higher ratings for similar issuers than under foreign rivals’ practices. Most domestic assessors give ratings between AA and AAA, whereas their overseas counterparts typically rate similar issuers six to seven levels lower, according to a working paper from the People’s Bank of China.
  • Local providers charge lower fees. Domestic firms typically charge around 250,000 yuan ($37,000) for the initial grade and 50,000 to 100,000 yuan for follow-up ratings, which Yan anticipates will be hard for global rating firms to compete against.

Funding costs have increased in China’s corporate bond market, making loans more attractive -- read more about that here.

There are six major rating firms in China, including China Lianhe Credit Rating Co., in which Fitch has a 49 percent stake, and Shanghai Brilliance Credit Rating & Investors Service Co., which is a domestic partner of S&P. That competition holds down prices, according to Yan. 

S&P, Moody’s and Fitch declined to disclose fees they charge for their service. S&P believes markets are best served by a diversity of credit views, according to Michelle Lei, spokesperson for S&P in Beijing. “Ultimately, it will be investors and other users of ratings who determine which ratings are credible and useful and which are not,” she said.

China Chengxin is now the top dog locally, with a market share of about 37 percent in China’s interbank bond market and about 33 percent in the exchange bond market, according to Yan. The firm now has more than 400 analysts, compared with 20 to 30 back in 2005, he said.

With their generally lower ratings for Chinese companies, "if China’s local market is dominated by foreign-owned agencies, it will have a big impact on Chinese issuers" in terms of cost, Yan said.

— With assistance by Yuling Yang, and Lianting Tu

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