China's credit rating analysis gap presents opportunity
Chinese asset management firms see an opportunity to fill a knowledge gap based on the lack of quality credit rating servcies in the country as it opens its interbank bond market to foreign institutional investors.
Benjamin Rudd, head of overseas investment for Ping An of China Asset Management (Hong Kong), sees potential to work with investors such as central banks and sovereign wealth funds to provide advisory credit analysis on onshore fixed income funds, given that Ping An has spent over a decade performing credit analysis on Chinese bond issuers.
While there are local credit rating agencies operating in China, their credibility in the eyes of foreign investors tends to lag that of the global agencies.
That said, international rating agencies such as Moody’s and Standard & Poor's, which are banned from giving ratings to onshore China credits, are still coping with their own reputational issues on the back of perceived failures ahead of the global financial crisis in 2008.
Rudd notes that Ping An AM's fixed income team in Shanghai has been conducting internal credit ratings for proprietary investment purposes since 2003.
Over the past eight years the team has built a database on the nation’s history of default, and accumulated information on the organisational structure of Chinese corporate issuers. At present, he says the team rates over 1,500 Chinese credits.
“Given the complexity and lack of historical data, there has to be a need for greater institutional support to come through from the Chinese fund management industry to help foreign investor fund flows to grow," says Rudd. "They need to work with partners when they directly manage fixed income portfolios.”
Under the broad banner of renminbi internationalisation, China’s central bank is opening channels through which renminbi held offshore can be invested in the onshore interbank bond market, which at Rmb21.4 trillion ($3.4 trillion) contained over 90% of China's outstanding bond value as at January this year.
Under a pilot scheme announced in August 2010, the People’s Bank of China (PBoC) permitted foreign central banks to apply for an investment quota, and since then central banks from Malaysia and Austria have been approved to invest.
Just last week, the PBoC also signed an agreement in Washington with the International Bank of Reconstruction and Development and the International Development Association to allow the two World Bank agencies to invest in China's onshore bond market.
China’s gradual attempt to introduce greater liberalisation of its onshore bond market and controlled opening of its capital account is underlined by the appointment of foreign banks, including HSBC China, as bond settlement agency banks for national asset owners.
Meanwhile, other industry players are anticipating that China’s foreign exchange regulator, the State Administration of Foreign Exchange, will allow more investment into China’s interbank bond market through the qualified foreign institutional investor (QFII) scheme. At present, the bulk of such QFII investment goes into the equities market.
Such increased investment avenues might spell potential for attractive returns but the risk is largely unknown, especially to foreign investors, because of a lack of precedent cases of bond issuers defaulting in China.
This has meant that foreign investors wanting to invest into the onshore interbank bond market and gauge what the related credit, liquidity or policy risk would be might need to start building that knowledge from scratch in China.
That, in turn, begs the question of scale as foreign investors might not consider the investment quota awarded by Chinese authorities to be sizeable enough to justify onshore investment.
Rudd is confident that foreign institutional investors could essentially outsource credit analysis through a partnership with asset managers such as Ping An. His team in Hong Kong has already started offering advice to clients on offshore renminbi credits – dim sum bonds issued in CNH.
“Today, Ping An of China Asset Management in Hong Kong is already sharing our group’s credit analysis capability in Shanghai headquarters to help our team in Hong Kong to analyse and assess dim sum bond issuers, many of whose credit health today is still unclear to investors as they are not rated by rating agencies,” notes Rudd.