The initiative to spread ratings capability beyond Mainland China reflects mounting investor concerns about the country’s corporate debt burden and rising default levels.
However, “a top-down approach is important when one looks at Chinese bonds, so ratings should reflect a ‘China perspective’”, Warut Promboon, chief rating officer at Dagong Global Credit Rating in Hong Kong, told Fund Selector Asia.
“In Beijing, we have our own national scale rating for corporates, and use the global system for rating sovereigns, but in the Hong Kong office we apply global criteria for corporate ratings,” he said.
The national scale only compares the bond issuer against domestic peers, hence ratings tend to be higher, he explained.
The Beijing-based independent credit rating agency was founded in 1994 and the Hong Kong office was set up in 2014. Promboon joined the firm in February last year from Societe Generale (Hong Kong) as the director of Asian credit research.
“The role of the Hong Kong [office] is to use the data [from the Beijing office], and translate it so that investors outside China can understand it,” he added.
Other factors to consider include the level of government support, and the fact that it will be harder to claim payments back in the event of an onshore bond default than from an issue under overseas jurisdiction.
“A rule of thumb is that any bonds that are BBB- on a global scale rating will be the equivalent of AAA onshore,” said Promboon.
Bonds issued by real estate group Evergrande are rated AAA onshore but BB- overseas.
“The difference is that Evergrande is systemically important to China’s economy. We factor in that aspect for potential support by the government,” he said.
Dagong’s ambition to internationalise comes at a time when investors are getting more concerned about rising Mainland bond defaults.
Last month, China’s state-owned Guangxi Nonferrous Metals Group became the first interbank bond issuer to go bankrupt.
“We are going to see more defaults, both onshore and offshore. Among offshore credits, I am more concerned about the energy sector, and also shipping industry.”
The default by Singaporean oilfield services provider Swiber Holdings is “the tip of an iceberg,” he said.
As for defaults in China, “it’s actually good for the government to let the default happen first before coming in.”
While state-owned enterprises (SOEs) usually give investors more confidence, “there are many levels of SOEs,” he noted, depending on factors such as their resources and relationship with municipal authorities.
