China's rating agencies can use HK, Singapore as bases for overseas expansion

Source:Global Times Published: 2017/9/13 22:28:39

China’s rating agencies pursue global expansion

Illustration: Peter C. Espina/GT

The internationalization of China's credit-rating agencies is still in its infancy. It's true that some of these agencies have launched operations in overseas markets including Hong Kong and Europe, but their share of these markets remains fairly small and they have very limited, if any, market clout. Domestic credit-rating agencies have a tough road ahead to compete with established international players.

The global credit-rating industry is an example of an oligopoly, with the big three credit-rating agencies - Standard & Poor's, Moody's and Fitch - capturing more than 90 percent of the market, even though there are more than 160 rating agencies across the globe.

The big three credit-rating agencies forged a path to internationalization by using their vast experience and high public credibility. They set up subsidiaries and offices, bought stakes in local credit-rating agencies and pursued strategic mergers, among other methods.

The European market has been the main destination for the big three credit-rating agencies as they pursue internationalization. They have established multiple branches and offices in Europe and have over the years gradually taken firm hold of the continent's credit-rating service market. Their share of the EU market has reached 92.85 percent.

In markets other than Europe and the US, notably Singapore and Hong Kong where the local bond markets are highly international and the oversight of the credit-rating sector is relatively lax, the big three almost entirely dominate the market for credit-rating services.

In other regions where market conditions, policies, laws and regulations are vastly different from those of the EU and the US, and the financial markets lag behind in terms of development, the big three have made a comparatively late foray into the Asia-Pacific, Latin America, Africa and the Middle East.

In light of the industry heavyweights' proven track record in expanding internationally and the realities of China's credit-rating sector, the country's indigenous credit-rating agencies should gain a footprint in the yuan-denominated bond market and gradually explore the world beyond their home turf.

Initially, they should start operations in Hong Kong, the most important market for offshore yuan-denominated bonds. The rollout of the Bond Connect linking the Chinese mainland and Hong Kong enables mutual market access. If domestic credit-rating agencies fail to satisfy investors' needs in this market, their international counterparts will start to eat into China's credit-rating market, thus intensifying competition in onshore bond ratings.

In addition to the big three global credit-rating agencies, three domestic agencies - Dagong, China Chengxin and Pengyuan - have set up branches in Hong Kong and have been licensed to provide credit-rating services in the city. The domestic raters are still expected to have an advantage in terms of rating offshore yuan-denominated bonds following the launch of the bond connect.

Going further, domestic raters can apply for credit-rating qualifications and licenses in more countries and regions, for instance the US and Europe, to participate in credit ratings for bonds denominated in different currencies. 

Also, domestic credit-rating agencies can set up offices in countries and regions along the Belt and Road (B&R) route and do some preparatory work such as conducting market research, gathering data and establishing contact with potential clients.

After fully understanding local credit-rating policies, market demand for credit-rating services and the local competition, they can then decide whether to explore deeper into the market.

Take Singapore as an example. The city-state is a major offshore trading center for the yuan and its credit-rating sector is highly open to foreign investment. It is advisable that Chinese credit-rating agencies open offices or branches first in Singapore where the credit-rating business for offshore yuan-denominated bonds is expected to grow. Singapore is also part of the B&R initiative, so it's important for domestic raters to pursue local participation.

Furthermore, China's rating agencies can pursue technological and strategic cooperation with other small and medium-sized international peers such as Canada's DBRS, Japan's JCR and Mexico's HR Ratings,  to reach out to global investors and issuers with an interest in yuan-denominated bonds.

Lessons can be drawn from JCR's internationalization strategy. The Japan-based agency formed strategic alliances with rating agencies from many other countries, which helped JCR serve Japanese companies that raised funds in overseas markets and increased the rating agency's clout in the international market.

Chinese rating agencies can learn from the big three global raters, which have sought to sign strategic partnerships with local rating agencies in countries and regions where they are required to meet a high legal threshold.

This article was compiled based on a recent report by China Lianhe Credit Rating Co.
Newspaper headline: China’s rating agencies pursue global expansion


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