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On June 19, 2024, China Chengxin (Asia Pacific) Credit Ratings Company Limited (“CCXAP” became the first Chinese credit rating agency recognized under the Hong Kong Monetary Authority’s (“HKMA”) Qualifying Debt Instrument Scheme (“QDI Scheme”) and Green and Sustainable Finance Grant Scheme (“GSF Grant Scheme”). Previously, the four recognized rating agencies were all foreign credit rating agencies. The recognition marks a significant step forward to the internationalization of Chinese rating agencies.
The HKMA is Hong Kong’s central banking institution, responsible for maintaining monetary stability, promoting financial system stability and soundness, strengthening Hong Kong’s status as an international financial center, and managing the Exchange Fund. The HKMA also oversees the banking industry and plays a crucial role in the development of Hong Kong’s bond market.
Meaning of this Recognition
The first-time inclusion of a Chinese rating agency for the HKMA's QDI Scheme is of great and far-reaching significance. It confirms that the international development of Chinese rating agencies is gradually being recognized by overseas markets and regulatory bodies, accelerating their internationalization process, enhancing their international competitiveness and influence, and supporting high-quality financial development and further opening-up. Additionally, adding new recognized rating agencies does strengthen the dynamism of the overseas credit rating market, providing more diverse credit rating information for market participants. Chinese rating agencies have inherent information advantages and professional strengths in the Chinese market, aiding global investors in better understanding and managing the rating logic and credit risk of Chinese issuers.
In October 2023, General Secretary Xi Jinping, at the Central Financial Work Conference, first proposed “to accelerate the construction of a financial power”. As a crucial infrastructure of the bond market, credit rating needs to uphold innovation and take on the mission of the times, pioneering a development path for the rating industry with Chinese characteristics and contributing to building a financial power. Currently, China’s economy is deeply integrated into the world economy. Xi Jinping emphasized that “through expanding opening-up, we must improve our efficiency and ability to allocate financial resources, enhance international competitiveness, and influence rules”. As China’s financial market opening increases, Chinese rating agencies are needed to provide internationally recognized rating results, offering pricing references for financial products in international markets and avoiding pricing power falling to others, which could lead to financial market turbulence. Strengthening the internationalization of Chinese rating agencies also helps reshape the global financial governance structure, seizing the initiative in rating to safeguard national financial security, and providing a reference for regulators in managing cross-border risks. Moreover, amidst intensifying major power rivalry and a complex external environment, promoting the internationalization of the rating industry helps to export viewpoints more aligned with national interests, thereby seizing the initiative in rating and better maintaining national financial stability and security.
What is QDI Scheme?
The QDI Scheme is a tax concession scheme launched by the Hong Kong government in 1996 to attract overseas issuers to issue bonds in Hong Kong and expand the Hong Kong bond market. Under the QDI Scheme, interest income and profits from qualifying debt instruments issued on or after April 1, 2018, are exempt from profits tax. Currently, the profits tax rate for corporations under the general tax regime is 16.5%, and for individuals, it is 15%; under the two-tiered tax regime, the tax rate for corporations on the first HKD 2 million of assessable profits is 8.25%, and 16.5% for the portion exceeding HKD 2 million; for individuals, it is 7.5% for the first HKD 2 million and 15% for the portion exceeding HKD 2 million. Under the profits tax exemption scheme provided in Section 14A of the Inland Revenue Ordinance, qualifying debt instruments must meet the minimum rating requirements given by a credit rating agency recognized by the HKMA.
What are minimum rating requirements given by HKMA recognized credit rating Agencies?
There are only five credit rating agencies recognized by the HKMA under the QDI Scheme. Besides CCXAP, the other four are Fitch, Moody’s, S&P, and R&I, all of which are foreign institutions. Qualifying debt instruments must obtain at least the minimum rating from these five rating agencies, such as, CCXAP’s BBBg- rating for long-term debt instruments or Ag-3 rating for short-term debt instruments.
Does this recognition apply to HKMA’s Green and Sustainable Finance Grant Scheme?
CCXAP’s ratings also apply to GSF Grant Scheme launched by the HKMA in May 2021. The GSF Grant Scheme provides grants for eligible green and sustainable bonds and loans issued in Hong Kong, covering general debt issuance expenses and external review fees. Issuers can receive grants covering half of the eligible expenses for general debt issuance costs, with a cap of HKD 2.5 million if the bond obtains a rating from a recognized rating agency. Eligible expenses include listing fees, custody and settlement fees, and other professional services such as legal advisors, auditors, and credit rating agencies. For external review fees, the grant amount covers the full eligible expense, with a cap of HKD 800,000 per issuance (including a pre-issuance cap of HKD 250,000 and a post-issuance cap of HKD 200,000 per year, for a maximum of three years). On May 3, 2024, the HKMA announced the extension of the GSF Grant Scheme to 2027 and expanded its scope to include transition bonds and loans to further encourage the use of Hong Kong’s transition financing platform by relevant industries in the region for gradual decarbonization.
CCXAP is a subsidiary of China Chengxin International Credit Rating Co., Ltd. (“CCXI”), the largest rating agency in China and a leader in the Chinese rating industry. In June 2012, CCXAP obtained the Type 10 license (providing credit rating services) issued by the Hong Kong Securities and Futures Commission, becoming the first Chinese credit rating agency qualified to conduct rating business in overseas markets. As an overseas branch of China Chengxin Group, CCXAP serves as a window for conveying credit judgments on domestic and foreign enterprises to overseas investors and holds significant strategic importance within the Group.