Unreliable credit ratings deter overseas investors from joining China’s onshore bond market

While Beijing is applauded for its efforts to open the nation’s capital markets to overseas investors, unreliable credit ratings in China’s onshore bond market are still a major concern for many foreign investors.

In a major step towards opening up, the Chinese government earlier this year granted global central banks, sovereign money managers and other offshore long-term institutional investors full access to its interbank bond market.

Although months have passed since the milestone step, total foreign investment is still moderate compared to the total size of the market.

While overseas investors worry about increasing credit risks and depreciation prospects for the yuan as the Chinese economy slows, they are even more concerned when they see credit ratings that consistently fail to reflect risks in the world’s third largest bond market.

“I believe this will be a barrier to entry for many overseas institutional investors that are required to rely on credit ratings as part of their investment criteria,” said Jamie Tadelis, co-founder and head of sales at SC Lowy, a fixed-income specialist focused on Asia Pacific, Europe and the Middle East.

The sentiment is echoed by Moody’s, which said in a report that foreign investment is expected to be concentrated in sovereign, sub-sovereign and policy bank bonds, adding that a factor holding investors back from corporate bonds is that they are not familiar with Chinese domestic ratings, which are markedly different from international ratings used in the offshore market.