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S&P wants in on China’s $11-trillion bond market

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S&P GLOBAL Inc. plans to offer its ratings services in the Chinese domestic bond market, with an eye on buying a majority stake in a local agency or setting up a new entity there to do so, its chief financial officer said.

The world’s largest credit rater’s plan to assess the yuan-denominated bonds of Chinese firms follows the People’s Bank of China’s decision last year to allow international ratings companies to set up their own businesses in the nation, according to CFO Ewout Steenbergen.

“That’s been a game-changer with respect to the domestic Chinese bond-market situation,” he said in an interview. “We are very actively looking at opportunities for the future.”

China is seeking to open up the world’s third-largest bond market as it seeks a greater global role for its currency. Debt ratings have been one sticking point, as regulators and investors have expressed concerns that some local assessments are inflated. More than 40% of the country’s domestic corporate notes are graded AAA, according to data compiled by Bloomberg based on assessments issued by the four major domestic agencies.

Regulators want the “market to open up, to get more mature, so that the standards are different,” Steenbergen said. “That way it will become more attractive for international investors.”

S&P Global’s ratings unit already grades the international bond offerings of Chinese companies. Its potential entry into the domestic note market, and the timing of such a move, will depend on how regulations continue to develop, Steenbergen said.

“Once that becomes more clear, we are ready,” he said. “For us it’s very important we can apply our important global standards also to the Chinese market.”

Lulled by years of implicit government support for troubled companies, locals are now having to get acquainted with defaults, which have jumped since the end of 2015 as Beijing shuts down unproductive industries.

Opening up China’s $11-trillion bond market is a crucial step to balancing pressures on capital flows in and out of China. If sustained, it could make it less risky for policy makers to relax controls on domestic companies and households taking money out of the country.

S&P Global Ratings cut China’s sovereign credit rating by one step to A+ from AA- and revised its outlook to stable from negative in September. Its first downgrade to the rating since 1999 was due to risks of its growing debt burden, it said at the time. — Bloomberg