Article Preview – ‘A New Era for Chinese Credit Rating Provision’ – Journal of Business Law

Today’s post previews a forthcoming article by this author that is due to be published in the Journal of Business Law. The article is available in its pre-published format here. The aim of the article is to assess the new development within the global credit rating arena, in that China has allowed Standard & Poor’s entry, as a stand-alone entity, into its marketplace for the very first time. The move to allow the largest global credit rating agency into the Chinese market, without having to be aligned to a domestic agency, is unprecedented. Considering that Moody’s has apparently set up a stand-alone entity and is in the process of applying for the licence to operate within China, the article discusses the environment that the agencies are entering, whether there is a need for them at all, and if so then why.

The article starts by analysing the development of the credit markets in China, which naturally leads to the development of the internal credit rating market. Through a number of actions by the state in the late 1980s and beyond, credit rating became a necessary function. In response, the People’s Bank of China (PBoC) would develop rating divisions which would, in time, be spun off into stand-alone rating agencies – a number of Chinese domestic rating agencies can trace their origins to the central bank. However, as a response to the Asian Financial Crisis in the 1990s, the Chinese appetite for credit, and with it credit rating agencies, was rapidly diminished. The Chinese regulators took a similar approach to the American regulators, essentially producing ‘licences’ for certain firms to continue their rating businesses (akin to the ‘Nationally Recognised Statistical Rating Organisation’ status given out by the US Securities and Exchange Commission). These agencies – China Chengxin, Dagong, China Lianhe, Shanghai Brilliance, and Shanghai Far East – became the core of the Chinese credit rating market and through the late 1990s to the mid-2000s, the regulators sought to fence off the marketplace. In line with this state-controlled marketplace, foreign entities like S&P and Moody’s were only allowed to operate in China if they were working in conjunction with an established Chinese rating agency.

However, the regulatory regime for CRAs in China has been, traditionally, fragmented. The article discusses the issues that emanate from a fragmented regulatory regime, but the result was a foreseeable one. After the Financial Crisis, Dagong especially was active on the global scene – this author has written an article on the Universal Credit Rating Group, which saw Dagong join forces with Egan-Jones Ratings and RusRatings in order to challenge the hegemony of the Big Three. Despite all the positivity surrounding the challenger, the tide has turned and the agency finds itself under mounting pressure. In 2018 Dugong had its domestic licence suspended for a year on account of its consultancy business and its effect between it and its clients. The article discusses how research has suggested that the Chinese rating marketplace is riddled with inherent issues, issues based on a variety of problems that stem from a prevalence to inflate ratings based upon market concentration to an oligopolistic marketplace that is attempting to guard against foreign entry. The result has been for the domestic credit rating market to lose its reputational authority just at the time the Chinese need it the most and, as such, the Chinese government has taken action.

The article discusses the Chinese environment and its ascension from a colonial victim to a global powerhouse. As such, China is now looking outward but needs investment in order to make that aim a reality. That investment requires foreign investors to trust the Chinese marketplace more than it does, and the domestic Chinese credit rating agencies, for a number of reasons, cannot make that happen. It is for this reason, the article suggests, that China has now opened its doors to the global credit rating agencies. Irrespective of the issues that seem to be inherent within the Big Three, they continue to act as the ‘signaller’ to the global capital markets, and China really needs access to those markets. The article concludes by examining this concept further and calling for more research once S&P, and more-than-likely Moody’s set up shop on the country permanently. The fact that S&P has developed a China-specific entity, rather than apply its global set of methodologies, has raised questions as to the usefulness of the connection, but the rewards on offer for the global capital marketplace means that if the global CRAs give the go-ahead to invest heavily in the Chinese marketplace, then the dynamics of the global marketplace may be very different in the near future.

Keywords – China, Credit Rating, S&P, Business, @finregmatters