INTERVIEW-China's bond default risks set to rise in 2017 - Chengxin

* More firms may need restructuring or govt bailout next year

* Total size of maturing bonds may reach 5.5 trln yuan in 2017

* Low foreign ratings of Chinese property developers proven wrong

BEIJING, Dec 12 (Reuters) - China’s bond market will see more defaults next year even as the government steps up support for state firms struggling with high debt obligations, domestic rating firm China Chengxin Credit Management Co Chairman Mao Zhenhua said.

“Next year, the risk (of bond defaults) will be even greater than this year,” Mao told Reuters over the weekend. He said that while many companies would eventually pay their obligations, they may require a “restructuring or government rescue”.

More than 4.3 trillion yuan ($621.9 billion) worth of bonds will mature in 2017, China Chengxin said earlier this month. Alongside short-term debt expected to be issued next year, the total size of maturing bonds may reach 5.5 trillion yuan.

Since the first bond default by a corporate issuer in 2014, there have been 85 defaults totalling more than 37 billion yuan, the rating agency said.

Investors are concerned about the creditworthiness of Chinese companies who have financed their operations with cheap loans and debt and are now struggling to repay as profits fall.

Mao dismissed criticism that domestic ratings firms were too “optimistic” and provided higher ratings to domestic companies than some investors believed they deserved.

“Credit ratings are about accuracy,” he said. “It doesn’t mean the lower (the ratings), the better (the risk assessment).”

China’s credit ratings market has been dominated by big domestic players, led by China Chengxin, China Lianhe Credit Rating Co and Dagong Global Credit Rating Co.

International firms, including Moody’s Investors Service and Fitch Ratings, are only allowed to operate onshore through minority stakes in joint-venture operations.

That may be changing as Beijing recently published draft foreign investment guidelines that could lead to fully opening its credit rating market to foreign participants and raise investment in the $7 trillion bond market.

Mao said foreign rating agencies have held a poor view on China, reflected in the ratings of local property developers.

“For more than 10 years, they gave domestic real estate firms very low ratings. It’s become a miracle in the world of bond ratings. Those firms paid high interest for a long time but never defaulted. It proves those ratings were wrong.”

Mao, a former policy researcher working for the State Council, China’s cabinet, left his government job and founded the country’s first credit rating agency, China Chengxin, in 1992. Moody’s acquired a 49 percent stake in its subsidiary China Chengxin International Credit Rating Co in 2006.

China Chengxin has a 35 percent to 40 percent share of the domestic market, Mao said, with annual revenue estimated at about 700 million yuan.

Mao is not daunted by rising foreign competition.

“If they were allowed to independently operate in China, their ratings capability would not be as great as ours. After all, we have been in the market for 25 years,” Mao added.

$1 = 6.9145 Chinese yuan Editing by Jacqueline Wong