Will licence to operate for US rating agencies equate quick entry into China’s bond market? Far from it

Foreign rating agencies might soon be granted their first licences to operate in China, but their access to rate domestic bonds and traditional products that account for most of the market in the short term could be limited by regulatory constraints and their know-how of the mainland landscape, said Chinese executives in the industry.

The warning comes amid rising expectations that China, under mounting US pressure, would accelerate its pace of opening up the financial services sector after the trade truce between the two countries was struck at the weekend.

China’s has for two decades, restricted foreign rating agencies to partner with Chinese firms. Allowing foreign players to provide services independently could shake up a colluded domestic rating service market in which Chinese agencies tend to give high ratings to mainland issuers, and provide greater comfort to foreign investors seeking to invest in China’s US$11 trillion bond market.

But foreign firms would face a number of hurdles to fully access the Chinese domestic market, according to one of the executives who works at a major domestic rating service and spoke on the condition of anonymity.

He said they would have to overcome political uncertainties surrounding Beijing’s desire to influence the international rating market and the country’s paranoia about financial security, exacerbated by its sensitivity to previous sovereign rating downgrades by foreign agencies. The Ministry of Finance hit back at Moody’s and S&P’s move to downgrade China’s sovereign credit rating by a notch last year, calling it a “wrong decision”.

In addition, foreign firms, the executive said, would need to adopt domestic rating standards and work within China’s strict regulatory environment.