Bond market efficiency to improve with presence of top ratings firms

The efficiency of the bond markets will improve remarkably as China has made concrete steps in opening up the credit ratings industry, marked by the recent approval of S&P Global's application to enter the industry, analysts said.

"The permission for S&P Global's wholly owned subsidiary to enter the domestic credit ratings market indicates that China has completed all the steps of opening up its bond credit ratings industry," said Yu Chunjiang, deputy director of ratings at Golden Credit Rating International Co Ltd, a Chinese credit ratings agency.

The People's Bank of China, the central bank, said on Monday that it had approved the filing from S&P Global (China) Ratings, a wholly-owned subsidiary of US-based S&P Global, a major global ratings service and financial information provider.

The subsidiary has also received approval for its registration application to provide ratings services in China's interbank bond market, the PBOC said.

Finishing the above approval procedures, S&P Global (China) Ratings has become the first wholly-owned foreign enterprise able to rate domestic Chinese bonds, the company said.

Besides S&P Global, the other two major international credit ratings agencies－Fitch Ratings and Moody's－have also established wholly-owned subsidiaries in China last year, although they still need to first get approval to carry out the bond rating business.

"Now, China's credit ratings market is very open to the outside world," Yu said.

"The increasing presence of foreign players in the Chinese market can be expected. Domestic ratings agencies like us are motivated to improve our techniques and services quality to shape our distinctive advantages," Yu said.

"Besides ratings agencies, domestic bond issuers, investors and regulators will also be exposed to changes as a result of deepening industrial opening-up," said Liu Chunsheng, an associate professor of economics at the Beijing-based Central University of Finance and Economics. "This will improve market efficiency."

To get accustomed to global agencies' standardized, transparent rating procedures, domestic bond issuers will need to strengthen information disclosure and better comply with global standards, Liu said.

Ushering in more foreign credit ratings players can also help to build a specialized market for junk bonds in China, which will better price such bonds issued by some private businesses and facilitate their financing, said a report from Xinjiang-based Shenwan Hongyuan Securities on Tuesday.

"That is how financial opening-up is helping China to achieve high-quality growth," Liu said. "It pushes each market entity to make improvements and helps the market to better price different assets and better allocate resources."

China has sped up financial opening-up in recent years. In 2018, the country removed foreign ownership caps of banks and financial asset managers. Foreign capital was also allowed to have majority ownership of securities firms, fund managers and futures companies in China.

Analysts said the opening-up of the credit ratings industry could also increase allure of China's bond markets for overseas investors, as foreign agencies will provide bond ratings better understood by global investors than domestic ones.

Mary Schapiro, vice-chairman of Bloomberg, said earlier that China's bond market is the third largest in the world, but still largely unexplored by global investors, partly due to relatively low market efficiency. "(Improvements in) cost, liquidity and price transparency are paramount."