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First onshore credit rating comes at pivotal time

As China's corporate credit concerns rise and growth slows, foreign credit ratings firms eye onshore bond ratings.

S&P Global China’s announcement that it has assigned a AAA issuer credit rating to ICBC Financial Leasing (ICBCFL) signals the first time a wholly foreign-owned credit ratings agency in China rated an onshore bond.

ICBCFL, owned by ICBC, China’s largest bank, is a financial leasing company with operations in the aviation, shipping and equipment segments and it gets a “stable” outlook from S&P.

Previously, foreign firms could rate onshore bonds, but only through joint venture arrangements with domestic firms.

Competitor Fitch Ratings has applied for permission to operate a wholly-owned operation domestically and is awaiting approval, according to local reports.

Moody’s was contacted by FSA but declined to comment other than the statement “We are exploring ways to better serve our customers and contribute to the development of the Chinese market.”

Both Fitch and Moody’s have mainland joint ventures in which they hold minority stakes, but currently rate only offshore bonds.

The credit ratings firms are keen to launch their services domestically to address growing foreign interest in China’s $12trn onshore bond market.

Foreign capital in the domestic bond market is still under 5%, but China is rapidly opening up its financial industry while the inclusion of equities and bonds on international indices have raised expectations of strong foreign capital inflows.

Several channels are available for onshore bonds: the China Interbank Bond Market Direct, the Qualified Foreign Institutional Investor (QFII) and RQFII routes and the Bond Connect, which is a more straightforward route without quotas.

“As the internationalization process of China’s financial market is accelerating, the introduction of global rating agencies aims to meet the diversified asset allocation demands from international investors on yuan-denominated assets,” China’s  PBOC said in a document, adding that the move would also improve the rating quality of the bond industry.

Two ratings methodologies?

The operations of S&P in China also come at a crucial time when corporate credit is overextended, GDP growth is slowing meaningfully and defaults are rising. China had a record year for bond defaults in 2018 and this year defaults seem to be on track to match it.

China has domestic ratings firms, but they have been criticised for being too generous with their ratings.

“It’s not meaningful to look at onshore ratings as too many are AAA-rated,” said Pheona Tsang, head of fixed income at BEA Union Investment Management, adding that the same AAA bonds could be rated by international rating agencies with grades from AA to BBB.

In 2017, the PBOC issued a working paper aimed at explaining the differences in onshore and offshore credit ratings.

“We find that larger asset size and higher leverage tend to result in firms receiving higher domestic ratings than adjusted global ratings, but higher profitability or state-ownership are more likely to result in firms receiving higher adjusted global ratings than domestic ratings,” the paper noted.

However, there may be government pressure on foreign ratings firms to temper their critical credit analysis of domestic firms in order to avoid accelerating capital outflows.

According to a report in Caixin, S&P and Fitch Ratings have plans to adopt new rating methods and standards tailored for the Chinese market, which raises concerns about their onshore methodologies.









Part of Mark Allen.