On June 19, 2024, the Hong Kong Monetary Authority (“HKMA”) approved China Chengxin (Asia Pacific) Credit Rating Co., Ltd. (hereinafter referred to as “Chengxin Asia Pacific”) as the first Chinese credit rating agency approved under the Qualified Debt Note Program (“QDI Program”). The four previously approved rating agencies were all foreign institutions.
The Hong Kong Monetary Authority is the central bank of Hong Kong. It is responsible for maintaining Hong Kong's monetary stability, promoting the stability and integrity of the financial system, consolidating Hong Kong's position as an international financial center, and managing the Exchange Fund. The HKMA is responsible for supervising the banking industry and also bears the important responsibility of promoting the development of Hong Kong's bond market.
The significance of this recognition
The Hong Kong Monetary Authority's QDI plan includes Chinese rating agencies in the scope of recognized credit rating agencies for the first time, which is of great and far-reaching significance. It confirms that the international development of Chinese rating agencies has gradually been recognized by overseas markets and regulators, accelerating the internationalization process of Chinese rating agencies, helping to enhance the international competitiveness and voice of Chinese rating agencies, and promoting high-quality financial development and further opening up. At the same time, the addition of new recognized rating agencies will help strengthen the development vitality of the overseas credit rating market and provide market participants with more diversified credit rating information. Chinese rating agencies have natural information advantages and professional strength in the Chinese market, which will help global investors better understand and control the rating logic and credit risks of Chinese issuers.
In October 2023, General Secretary Xi Jinping first proposed "accelerating the construction of a financial power" at the Central Financial Work Conference. As an important infrastructure of the bond market, credit ratings need to adhere to the principle of keeping integrity and innovation, bravely shoulder the mission of the times, and take a development path of the rating industry with Chinese characteristics to contribute to the construction of a financial power. At present, China's economy has been deeply integrated into the world economy. General Secretary Xi Jinping pointed out: "We must expand opening up to the outside world, improve the efficiency and ability of China's financial resource allocation, and enhance international competitiveness and the influence of rules." With the increasing openness of China's financial market, Chinese rating agencies are required to provide internationally recognized rating results to provide a reference for the pricing of financial products in the international market, so as to avoid the loss of pricing power and cause financial market turmoil. At the same time, strengthening the internationalization of Chinese rating agencies will help reconstruct the global financial governance structure, seize the initiative in ratings to maintain the country's financial security, avoid financial systemic risks caused by external unstable factors, and provide a reference for regulatory authorities to manage cross-border risks. In addition, in the context of intensified competition among major powers and increasingly complex external environment, promoting the internationalization of the rating industry will also help to output views that are more in line with the interests of the country, thereby seizing the initiative in ratings and better maintaining the country's financial stability and financial security.
What is the QDI Program?
The QDI Scheme is a tax incentive scheme launched by the Hong Kong Government in 1996 to attract overseas bond issuers to issue bonds in Hong Kong and expand the Hong Kong bond market. Under the QDI Scheme, interest income and profits from eligible debt instruments issued on or after April 1, 2018 are exempt from profits tax. Currently, the general tax rate for corporations is 16.5%, and for non-corporates is 15%; under the two-tiered tax rate, the assessable profits of corporations not exceeding HK$2 million are 8.25%, and the part exceeding HK$2 million is 16.5%, and the assessable profits of non-corporates not exceeding HK$2 million are 7.5%, and the part exceeding HK$2 million is 15%. Under the profits tax concession scheme under Section 14A of the Inland Revenue Ordinance, eligible debt instruments must meet the minimum rating requirements given by a credit rating agency recognized by the HKMA.
Credit rating agencies recognised by the HKMA
What are the minimum rating requirements?
There are only five credit rating agencies approved by the Hong Kong Monetary Authority under the QDI program. In addition to CCX Asia Pacific, the other four, including Fitch, Moody's, S&P and Japan R&I, are all foreign institutions. Qualified debt instruments must obtain the lowest rating of the following five rating agencies, such as BBBg -rating for CCX Asia Pacific's long-term debt instruments or Ag-3 rating for short-term debt instruments.
Is this recognition applicable to the HKMA?
Green and sustainable finance funding scheme?
The ratings of CCXAP also apply to the Green and Sustainable Finance Grant Scheme (the “Grant Scheme”) launched by the HKMA in May 2021 , which provides grants to eligible green and sustainable bonds and loans issued in Hong Kong, covering general debt issuance costs and external review fees. Issuers can receive a grant of half of the eligible costs for general debt issuance costs, with a maximum of HK$2.5 million if the bonds are rated by a recognized rating agency. Joint venture costs include listing fees, custody and settlement fees, and other professional service fees including legal advisors, auditors and credit rating agencies. For external review fees, the grant amount is the full amount of eligible costs, with a total grant limit of HK$800,000 for each issuance (including a pre-issuance cap of HK$250,000 and a post-issuance cap of HK$200,000 per year for up to 3 years). On May 3, 2024, the HKMA announced that the Grant Scheme would be extended to 2027 and the scope of the grant would be expanded to transition bonds and loans to further encourage relevant industries in the region to use Hong Kong's transition financing platform to gradually reduce carbon emissions.
CCXAP is a subsidiary of China Chengxin International Credit Rating Co., Ltd. ("CCXI"), the largest rating agency in China and a leader in China's rating industry. CCXAP obtained the Category 10 license (providing credit rating services) issued by the Hong Kong Securities Regulatory Commission in June 2012. It is the first Chinese-funded credit rating agency to obtain the qualification to engage in rating business in overseas markets . As an overseas branch of China Chengxin Group, CCXAP is a window for conveying credit judgments on domestic and foreign enterprises to overseas investors, and has a significant strategic position within the group.
