S&P looks to capitalize on last year’s trade deal that opened up China to U.S. ratings firms. S&P Global Inc. has notified the Chinese government of a plan to launch an independent credit-ratings firm in the country. 

S&P Global plans to build a stand-alone ratings business in China, bringing it a step closer to expanding its presence in one of the world’s biggest bond markets.  The company has notified the Chinese government of a plan to launch an independent credit-ratings firm in the country, an S&P spokesman said Wednesday. A trade deal last year opened up China to U.S. ratings firms. S&P is speaking with regulators on the entrance.

Moody’s Corp. , S&P and Fitch Ratings, have long coveted entry into China’s bond market, but they have had a volatile relationship with Beijing.

Rating firms’ relationship with China soured last year after both Moody’s and S&P lowered their views on China’s sovereign debt, citing concerns about a growing pile of debt. The downgrades drew a hostile response from China’s government and at one point even cast doubts on the rating firms’ future prospects for expanding their business in the country.

The move by S&P—the largest ratings firm based on the number of grades in existence —comes at a time when the U.S. and China have been embroiled in trade disputes. Tensions de-escalated this week after Treasury Secretary Steven Mnuchin said both countries would suspend tariff threats, although trade talks between the two countries remain uncertain.

Until now, S&P has had a partnership with a Chinese firm, Shanghai Brilliance Credit Rating & Investors Service Co., mostly providing help with technology and training. S&P said it would be discontinuing this partnership.  S&P’s grades of Chinese companies could open up the local yuan-denominated bond market to international investors and provide Chinese companies with access to lower-cost capital.

Fitch is planning to apply for a license from Chinese regulators to operate in the country, a spokesman for the firm said. It exited its joint venture in China earlier this year.

Moody’s owns a stake in Beijing-based China Chengxin International Credit Rating Co. Moody’s is “currently analyzing the options available to us,” a spokesman for the company said in an email.

One of the biggest challenges for S&P in China will be adjusting to a market where most bond issuers — the parties that pay for credit ratings — are used to lofty grades from local assessors.  Out of the roughly 4,570 corporate bond issuers in China, 88% have a domestic credit rating of AA or higher—grades that Moody’s, S&P and Fitch reserve for only the safest and most financially-sound companies.

For example, CEFC Shanghai International Group, a unit of CEFC China Energy Co., an oil conglomerate whose chairman has been under investigation, defaulted on two billion yuan worth of short-term bonds earlier this week. Despite the incident, the bond issuer carries a B rating from Lianhe Credit Rating Co., a domestic ratings firm that has downgraded the company three times since March from a AAA rating.

Source: The Wall Street Journal