S&P Global enters China’s bond credit rating market ahead of trade talks
Move will improve bond market, boost yuan use
Published: Jan 28, 2019 10:33 PM

A view of the People's Bank of China in Beijing in January Photo: VCG

S&P Global, a US-based rating agency, has been allowed to conduct local credit rating business via its wholly owned unit in the domestic market, the central bank announced on Monday, a milestone in China's financial market opening-up.

Industry insiders also said that the timing of the move, which comes ahead of top Chinese officials' visit to Washington, could send an upbeat note to the upcoming China-US trade talks. 

S&P Global has been approved by the People's Bank of China (PBC), the central bank, to set up a wholly owned company in China, according to a statement on the PBC's website. The Chinese arm is allowed to register for bond rating services in China's interbank market. This is the first time that a foreign credit rating agency is allowed to do so in China.

Introducing international rating agencies could meet foreign investors' demand for various yuan-denominated assets and improve the quality of ratings in China, the PBC said, adding that it will enhance the opening-up of the rating industry and support more qualified agencies to enter the Chinese market. 

"It is a milestone not only in China's financial market opening-up, but also in terms of the rising importance of China's bond market, which ranks as the world's third-largest, on the global stage," Cao Yuanzheng, chief economist at Bank of China International, told the Global Times. China is home to a bond market of about $11 trillion. 

The timing of the PBC's approval shows Beijing's good intentions for the coming trade talks between high-level officials from both sides, analysts said. 

After top leaders from China and the US met in Argentina in December which led to a 90-day trade truce, State-owned Sino Grain began to purchase a large amount of US soybeans and the Chinese government agreed to reduce import tariffs on US-made cars from 40 percent to 15 percent. These moves came before the approval of the business license for S&P Global to conduct credit ratings in the domestic market.

"All the above measures taken by Beijing show China's sincerity to push forward a deal with the US in the upcoming trade talks," an anonymous market watcher told the Global Times. 

Chinese Vice Premier Liu He is scheduled to visit the US on Wednesday and Thursday to discuss trade issues with top US officials. The stakes are high as the whole world is closely watching whether the two largest economies can reach an agreement to put the prolonged trade war to an end. 

Local credit ratings

Insiders said the entry of S&P will promote transformation and upgrading of the local credit rating sector, as there has been a lot of controversy about domestic ratings being "watered down" and "inflated" as local ratings agencies are usually paid by those who are rated instead of by those who pay for using such services. 

S&P will take market share from local firms as it is likely to expand in the high-end and high value-added sectors. In response, domestic firms are expected to improve their services and focus on breakthroughs in their rating methods, Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, told the Global Times.

For example, Dagong Global Credit Rating Co, which was suspended from providing bond rating services from August last year, earlier  assigned an AAA rating to China's Ministry of Railways, which is even higher than China's AA+ sovereign credit rating, triggering doubts on the credibility of the Chinese mainland-based rating agency. 

"Overseas ratings agencies' entry and their business models will bring competition and thus optimize the domestic rating industry," Shao Yu, chief economist at Shanghai-based Oriental Securities, told the Global Times. 

Dagong could not be reached for comment on S&P's entry by Global Times on Monday. China opened its domestic credit rating industry to overseas companies in 2017 amid its efforts to accelerate reform and create competition in bond market.  

Previously, S&P Global's ratings unit assessed international bonds issued by Chinese firms. Cao said that in the near future, S&P could also become involved in the ratings of panda bonds and dim sum bonds. 

"As more foreign capital flows into yuan-denominated bonds, the entry of S&P could also help the yuan play a bigger role on the global stage," Cao said. 

There are at least 11 rating agencies that have been granted licenses to rate issues in the domestic bond market, news website reported.

Huang Ge and Li Xuanmin contributed to this story.