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China picks S&P Global as first foreign bond rating agency

Beijing's move seeks to open doors wider for global investors

A man walks in the Shanghai financial district of Lujiazui. China seeks to attract overseas capital to its debt market, but many asset managers invest only in bonds rated by international agencies such as S&P Global.   © Reuters

HONG KONG -- U.S.-based S&P Global on Monday became the first foreign credit rating agency approved to rate China's domestic bonds as Beijing moves to attract more foreign investment.

CEO Douglas Peterson said in a statement S&P Global was "honored" to operate in Chinese bond markets.

A local subsidiary will be authorized to rate issuers and bonds from financial institutions and corporations, structured finance bonds as well as yuan-denominated debt from foreign issuers, known as Panda bonds, S&P Global.

The People's Bank of China said in a statement published on its website that it has accepted the registration of a subsidiary of S&P Global and that the central bank will continue to open up the ratings industry to more "influential and qualified" foreign players, as it looks to further liberalize China's financial sector.

The move comes as negotiators from the U.S. and China try to work out a deal to end a months-long trade dispute in which the American side demands greater access to and fairer rules in the world's second-largest economy.

Allowing foreign rating agencies to rate onshore bonds will help bring in overseas capital to China's debt market, as many major foreign asset managers only invest in bonds rated by international rating institutions. With economic growth hitting a 28-year low, Beijing seeks to draw in fresh foreign capital.

Fraser Howie, co-author of "Red Capitalism: The Fragile Financial Foundations of China's Extraordinary Rise," described the move as "an incremental but welcome step in the stalled reform process."

Howie, who has worked in China's capital markets since 1992, said in an email to the Nikkei Asian Review that approving a foreign ratings agency could have made a difference a decade ago, but the impact now is "minimal" as bad practices have become "ingrained in the marketplace."

Still, S&P Global's approval is expected to intensify the competition among credit rating businesses in China, where previously only local companies were allowed to operate. Domestic agencies have long been criticized by investors for giving lax ratings to debt issued by financially weak companies.

S&P Global was not able to respond to Nikkei's request for comment by the time of publishing.

S&P Global faces the challenge of maintaining its professional standards in China, where the authorities wield a powerful influence over foreign businesses.

"If you look at how Beijing operates, you have to think it is going to apply a lot of pressure to S&P to give the ratings it wants," said Christopher Balding, associate professor at Fulbright University Vietnam. Balding previously taught at the HSBC Business School at Peking University in Shenzhen.

"If S&P starts doing that same kind of rating pattern [as Chinese companies], it's going to lose credibility with international investors very, very fast," Balding said.

The other two big global credit rating agencies -- Fitch Ratings and Moody's Investors Service -- have also submitted applications to China's central bank and are awaiting approval.

A Fitch Ratings spokesperson said: "We are communicating closely with the regulators as part of the application process." A spokesperson at Moody's said it is "exploring ways" to better serve customers in China as the country's financial market expands.

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