Mainland ratings pioneer Mao Zhenhua reaches out to world

Mao Zhenhua led way 20 years ago and thriving bond market sees him reaching out to the world

PUBLISHED : Monday, 20 August, 2012, 12:00am
UPDATED : Monday, 20 August, 2012, 4:51am


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When Mao Zhenhua founded China's first credit ratings agency 20 years ago his dream was to build it into a mainland Moody's.

Now, the chairman of China Chengxin Credit Management, which has thrived in the past few years thanks to China's booming bond market, is taking a step toward going global. The agency just became the first mainland credit ratings business to open an office in Hong Kong, and Singapore is likely to be next.

A competitor, Dagong Global Credit Rating, whose international ambitions are reflected in its name, also has applied to Hong Kong securities regulators for a licence to operate in the city.

In the short term, the two agencies are eyeing what has been a burgeoning yuan-denominated bond market in Hong Kong, figuring their connections to mainland borrowers and local knowledge give them an edge over more established global rating agencies.

Since it was launched in 2007, the so-called dim sum market has surged. Last year, new issues totalled 107.9 billion yuan (HK$131.8 billion), triple the value of new issues in 2010. The number of issuers jumped to 91, including fast-food company McDonald's and heavy equipment maker Caterpillar, from just 16 in 2010, according to the Hong Kong Monetary Authority.

Beijing has been encouraging borrowers to tap the Hong Kong bond market for funds, partly to encourage wider international use of the Chinese currency. Besides mainland companies such as Dalian Port and China National Petroleum, banks including Chinese Development Bank and Bank of China have been active issuers. Last year, the Ministry of Finance made a mega-issue of 20 billion yuan in Hong Kong, and in June this year issued a further 23 billion yuan of sovereign bonds.

Regulators in Hong Kong don't require bond issues to be rated, and dim sum bonds usually are not. That doesn't seem to bother yield-driven individual investors in Hong Kong. And while the investment criteria of professional investors such as fund managers sometimes require an issue be rated, some are satisfied if the security is listed on the stock market, especially because that makes it more easily tradeable.

The Asian Development Bank was the first issuer to list its securities in Hong Kong, in 2010. Today, there are 41 dim sum bonds listed worth HK$66 billion.

Hu Yifan, chief economist at Haitong International Securities Group, is less optimistic about the future ratings demand from the dim sum bond market than are mainland credit rating agencies. Besides weak demand, she said, it would be "very hard" for companies such as Chengxin, which aren't as well known as a Moody's or a Fitch, to be widely accepted by investors in Hong Kong.

Mao, who has an economics degree from Wuhan University, founded Chengxin in 1992 when he was just 28. His aim was to found a business that was "very popular in mature markets but little known in China". So he hit upon setting up the agency, figuring there would be a need as financial markets developed.

Recalling the time he started the business from scratch, Mao smiled, saying: "I was too bold to fear any risks." He did not imagine the business would not make a profit in the first 15 years.

To foster a homegrown ratings industry, China requires Western firms such as Moody's, Standard & Poor's and Fitch to tie up with local partners.

Chengxin set up a joint venture with Moody's in 2006. China Lianhe Credit Rating, one of Chengxin's main rivals, is 49 per cent owned by Fitch, while Shanghai Brilliance Credit Rating has a technical services deal with Standard & Poor's.

Dagong, founded in 1994, hasn't partnered with any foreign investors.

"Credit ratings represent a nation's say on its own financial industry", so they need to stay independent, said Chen Jialin, deputy general manager of Dagong's international department.

The domestic credit rating business has flourished as the government has encouraged corporate and other borrowers to rely more on the bond market and less on bank loans. As in developed economies, local issuers pay the rating agencies for assessments of their creditworthiness.

Moody's tie with Chengxin came after the local company ceased a joint venture with Fitch and International Finance Corp, the investment arm of the World Bank, in 2004 because "almost no bonds were issued" at that time, according to Mao.

He said that before Chengxin set up a joint venture with Moody's, his company held a 60 per cent share of the domestic credit ratings market. Since then, Chengxin's market share has fallen to 35 per cent to 40 per cent, while revenue topped 2.5 trillion yuan last year.

(The office in Hong Kong is wholly owned by Chengxin and operates separately from the joint venture.)

"From a short-term perspective, I'm a loser," Mao said recently. Bringing in Moody's "caused us to lose some clients because our ratings are stricter" than other local rating agencies, he said.

"However, it's worthwhile in the long run" because the combination of Chengxin's deep local knowledge and Moody's advanced technology had given the joint venture a competitive edge over local rivals.

Moody's officials weren't available for comment.

Previously, joint ventures weren't allowed to rate bonds sold by companies listed on the domestic stock markets, though they could rate bonds issued on the so-called interbank market, where banks lend to each other. So Chengxin had a wholly owned unit that rated bonds the joint venture couldn't.

But in response to global calls for China to further open its financial industry, Mao said regulators recently gave the green light for joint ventures to apply for a licence to rate bonds issued by stock market listed companies on the mainland.

Additional reporting by Enoch Yiu