Fitch and Chengxin part company in China

Fitch Ratings has officially announced the end of its relationship to China Chengxin International Credit Rating.

In fact, the two companies abandoned co-operation more than a year ago, but regulatory approval from the reliably tardy Chinese authorities has only just come through.

Under the terms of the transaction, Fitch sold its 30% stake back to the parent company of the ratings agency. The re-sale price was less than $1 million, enabling Fitch to break even on the transaction.

The JV was set up so that Fitch would provide international ratings and its expertise to the Chinese partner, whiich would focus on domestic ratings. From now on, all Fitch rating activities will be undertaken by its representative in Beijing.

Fitch representatives deny this means a scaling back of Fitch activities, although a representative office is not permitted to carry out commercial activities.

"This is merely a matter of regrouping and coming back with a much bigger investment," says one Fitch source. "The rules regarding a wholly-foreign owned credit rating company are not completely clear, but we're very focused on the vast market in China."

Moody's opened up a wholly-foreign owned credit rating agency this year.

Foreign and domestic ratings companies have a tough time in China, since the corporate bond market is highly regulated.

With the stock market the preferred vehicle for fund raising, administratively set interest rates, an undeveloped yield curve and a lengthy regulatory process, the corporate bond market is a highly undeveloped fund raising channel.

Despite numerous promises to push the development of the bond market, the financial quota set each year by the state council has not greatly increased in the past few years.

Part of the reason is that the bond market was caught up in some unsavoury scandals at the beginning of the 1990s.

The separation also shows the difficulties relating to setting up a joint venture company with a Chinese partner, say some observers.

Fitch had 30% of the venture, with the World Bank's International Finance Corporation was in possession of another 15%. The role of the IFC was to provide seed money and good faith rather than to take a hands on part in the running of the agency.

Given the break up of the joint venture, there is little need for the IFC's role as facilitator and the World Bank unit is also selling its stake back to Chengxin.

The main sticking point was reportedly due the Chinese partner now being willing to give up majority control.

Fitch policy in any market is to obtain majority control, according to the press release released by Fitch.

The company was also dogged by differences in working practices and corporate cultures, according to observers.

Chengxin was not available for comment at the time of going to press.