Why China Sought Help With Credit Ratings for Bonds

One reason foreign investors think twice about dabbling in China’s $15 trillion bond market is the quality of domestic credit ratings -- and a pickup in defaults in late 2020 has cast fresh doubt on their reliability. The authorities sought to address such concerns last year by allowing S&P Global Inc. to become the first foreign ratings firm to operate independently in the country. The move proved to be a milestone but hardly a watershed. Even with Fitch Ratings Inc. also in China now, there’s a long way to go in a market where the vast majority of bonds receive stellar ratings and defaults can come out of nowhere.

Not just yet. The world’s top credit risk raters face a long journey to establish a substantial presence. While S&P received approval to grade all domestic bonds, Fitch is permitted only to rate financial institutions, their securities and structured finance bonds. Moody’s Corp., which has a joint venture with a local rating firm, is still waiting for its license to rate onshore bonds to be approved. Since it started early in 2019, S&P has issued just 19 ratings, including six issuer credit ratings. Fitch has assigned three ratings thus far. That’s a drop in the ocean compared with an overall 3,978 onshore ratings of debt products from 2,388 issuers in the second quarter of this year alone, according to the National Association of Financial Market Institutional Investors.