With foreign rating agencies entering the China market, China's rating agencies are facing challenges in terms of credit differentiation and relations with foreign investors. China has four major credit rating agencies: China Chengxin International Credit Rating, China Lianhe Credit Rating, Dagong Global Credit Rating and Shanghai Brilliance Credit Rating & Investors Service. These agencies use similar rating criteria as the three major international credit rating agencies (Fitch Ratings, Moody's Investors Service and S&P Global), and have been serving the China market well, according to Jenny Ai, vice president and head of credit rating committee at United Credit Ratings.

Earlier this year S&P Global ended its technical cooperation with Shanghai Brilliance Credit Rating, and Fitch Ratings has sold its 49% stake in China Lianhe Credit Rating. The two rating agencies are seeking licences to rate Chinese bonds, which will attract more foreign investors into China and help to expand the Chinese bond market, according to Ai at The Asset 12th Asian bond Markets Summit in Shanghai. 

One reason for this is the increasing international interest in the Chinese bond market, according to Ai. "After Bond Connect was launched in July 2017, foreign investors are increasing their renminbi asset allocation. Bloomberg announced that it will add Chinese RMB-denominated government and policy bank securities to the Bloomberg Barclays Global Aggregate Index," says Ai.

"Another reason that international rating agencies are coming into China is that the number of bond defaults increased this year," says Ai, noting that Chinese rating agencies are sometimes questioned and doubted in this context. "With international rating agencies entering China, competition should increase, but it will not be prominent at the beginning. They will have limited impact on the market share of Chinese rating agencies in the short run," says Ai.

However, in the long run, Chinese rating agencies will be faced with challenges if they fail to remove the doubts and improve their service, according to Ai. "Overseas investors tend to question Chinese credit rating agencies in that they can lack credit differentiation," says Ai, adding that it is challenging to make international investors understand the operating logic of Chinese rating agencies.

Despite the challenge, Chinese local rating agencies have an advantage given that Chinese agencies are more familiar with Chinese companies, per Ai. Yet there is still room for improvement, according to Ai. "We take international rating agencies entering the Chinese market as an opportunity. We need to improve in front of foreign investors and learn from international rating agencies. We need to internationalize our talent, and to improve relations with investors," says Ai.