China ‘overrated’ bonds may challenge foreign rating firms

Bloomberg

China has finally opened up its credit-rating market. But foreign credit assessors aren’t likely to waltz in, local money managers say. The challenge for rating companies, which generally charge issuers for scoring them, will be to win business from borrowers used to getting high grades from local assessors. That’s key after Sunday, which marked the day by which China had agreed to allow foreign-owned firms to provide credit ratings in the country.
The tendency of Chinese rating firms to dish out stellar scores has caught the attention of the nation’s regulators, as they try to liberalize financial markets to better price risk. China’s biggest bond clearing house has said some onshore corporate notes are “overrated” and local firms are “seriously” late in adjusting ratings. Meanwhile, foreign companies must confront the reality on the ground, where about 39 percent of local company bonds are rated AAA, compared with less than 2 percent in the US.
“If foreign rating agencies adopt the same rating methodology as overseas, there may be huge differences from ratings given by local firms,” said Chen Zhixin, Shenzhen-based head of fixed income research at Bosera Asset Manage- ment Co. “Given that issuers generally want financing costs to be as low as possible, it will be difficult for foreign rating agencies to expand in China.” While the big three foreign rating companies don’t yet rate local Chinese bonds, they do assess the country’s issuers in the international debt market.
Moody’s Investors Service, S&P Global Ratings and Fitch Ratings haven’t given any Chinese corporate bond in the offshore market a top rating in the past five years, a period in which borrowers from the country increasingly went overseas to raise funds.

DIVERGENT VIEWS
Take China’s most indebted property developer as an example. The three main foreign rating firms gave China Evergrande Group a junk rating, while their local competitor China Chengxin Securities Rating Co. rated it AAA.
Moody’s, Fitch and S&P have downgraded 48 Chinese issuers so far this year and upgraded 19 while major local rating firms cut 15 companies’ ratings and raised 152, according to Bloomberg-compiled data. S&P and Moody’s referred to previous statements when asked about their plans for the onshore market. Fitch declined to comment.
“We are reviewing the newly-released rules relating to the interbank bond market and will engage with regulators and other relevant stakeholders to determine how we can best serve the market,” S&P said. “As a general matter, we are encouraged by the policies of the Chinese government to open the Chinese capital markets, including to the credit rating agency industry,” Moody’s said.