S&P wins

S&P wins race for China's $11t bond market

Investors can now turn to a familiar face in China as S&P Global is granted the first licence to offer credit ratings services. Will this be a game-changer?

S&P Global has gained permission to set up a wholly-owned subsidiary based in Beijing to conduct credit-rating services for debt offerings in the nation's $11 trillion interbank market, according to a press release on Monday.

The People’s Bank of China (PBoC) said that approval for S&P meets demand from global investors who had increased their holdings of yuan-denominated assets.

“We believe that we are best equipped to provide an independent opinion on China’s debt markets as they develop, and we are ready to play our part,” John Berisford, president of S&P Global Ratings said in the press release.

And the introduction of an independent opinion is something investors have long been seeking.


China's onshore bond market saw a record number of defaults last year, with 123 corporate bonds totalling Rmb119.9 billion ($17.8 billion) defaulted, far outstripping the Rmb33.7 billion in defaults in 2017.

And already this year 13 Chinese corporate bonds totalling Rmb9.3 billion from nine issuers have defaulted, according to data from Wind Financial.

Last year, local rating agencies earned the ire of regulators after Dagong Ratings, a minor player in the sector, was banned from issuing ratings for a year over alleged reports of corruption.

“There is a level of skepticism of the local rating agencies from foreign investors,” Benjamin Quinlan, chief executive officer of Quinlan & Associates, a Hong Kong-based independent strategy consulting firm, said in a call to FinanceAsia.

This could partly explain why foreign investments account for only 2.3% of the onshore bond market. That is less than the 11% and 12% that foreigners currently hold in the South Korean and Japanese bond markets respectively.

“Any improvement and application of international best practices in the onshore market will probably be welcomed by international investors,” Quinlan said.


Fitch said in a statement that it has already applied for a licence and hopes to join S&P Global in the rating game soon.

“We welcome the move by Chinese regulators to strengthen supervision of the credit rating industry and increase transparency. It is a positive step for the development and internationalisation of the industry,” a spokesperson from Fitch Ratings said in an email to FinanceAsia.

By granting the licence to S&P, China’s ongoing efforts to liberalise the financial sector have been given a further boost following high-profile demands for deeper reforms by US negotiators during the US-China trade war-related discussions.

In addition to its registration with the PBoC, S&P has also registered with the National Association of Financial Market Institutional Investors, a central bank-backed body that oversees the interbank market.

And Chinese policymakers appear more open to hastening the pace of reform across capital markets as a whole.

Last month, UBS joined HSBC as the first group of foreign banks to get a majority stake in a joint venture, allowing them to underwrite equity and debt issuance and provide corporate advisory services on the mainland.

In November, American Express became the first foreign credit card network to win approval from the central bank to set up card clearing services in China.

To be sure, it must be noted that foreign players remain much smaller in comparison to established players and could struggle to gain a foothold. And much will depend on the relationships of the likes of S&P and Fitch can establish in the domestic market. 


S&P said it plans to use a system for rating bonds from private enterprises, local governments and other issuers in China in a tailor-made fashion to "fit the local situation".

S&P’s China unit will operate separately from the rest of the company, focusing solely on Chinese bonds.

In any case, the development marks yet another example of the Chinese regulators attempting to improve corporate governance in order to increase the investor base and attract more foreign investors.

China’s efforts to improve its environmental conditions have also led to a rise in green bond finance that foreign investors could be keen to play a part in.  China is the second-largest green bond market in the world after the United States and it saw $57 billion issued in 2017, which represents 23% of green bonds issued globally, according to FTSE Russell.

Earlier in the month, FTSE Russell also announced a Chinese Green Bond Index Series to more closely evaluate the growing sector.

And now with S&P allowed to operate in the interbank market, foreign investors have one more tool at their disposal when dipping their toes into China’s massive onshore bond market.


Additional reporting by HanShih Toh

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