Mainland eyes greater say in credit ratings

PUBLISHED : Wednesday, 28 July, 2010, 12:00am
UPDATED : Wednesday, 28 July, 2010, 12:00am

The head of the mainland's largest credit-rating agency believes the failure of the world's top credit-rating agencies to provide warnings of the global financial crisis could give the country a golden opportunity to increase its say in the industry.

Guan Jianzhong, chairman of Dagong Global Credit Rating, blamed Moody's Investors Service, Standard & Poor's and Fitch for the global financial crisis and said the mainland, as the world's leading creditor, and other emerging economies should have a say in how sovereign debt is rated.

'More credit-rating agencies from emerging economies should be set up and join hands to break the monopoly over the global credit-ratings business by the world's top three companies, all of which are American,' Guan said.

Beijing-based and privately owned Dagong gave the mainland's government a higher debt rating than the United States, Britain or Japan in a report published this month covering 50 nations, sparking speculation about close links with Beijing officials.

Guan said that Hong Kong was an ideal place to headquarter developing non-Western credit-rating agencies.

That could make the city a global hub for the credit-rating business to rival the American hold of global markets.

'The three leading Western rating companies dominate the rating market, but failed to provide accurate evaluations,' he said.

But Guan conceded that mainland ratings companies had also given some borrowers better rankings because they wanted to get their business. He also criticised the mainland's emerging credit-rating market, saying that ratings assigned to yuan-denominated bonds were also not accurate as those of their Western counterparts.

'The practice is dangerous as the ratings assigned do not reflect the risks investors face,' Guan said.

His comments came amid growing concern about credit risks stemming from record borrowing prompted by Beijing's massive stimulus package to cushion the global recession.

Guan said the global financial crisis made it more imperative for emerging economies to set up their own credit-rating agencies and reject the currently unfair international rating system controlled by Western companies.

Dagong is trying to turn the world of credit ratings on its head. It unveiled the first non-Western sovereign ranking report of credit ratings for the world's major economies earlier this month, which question the creditworthiness of major developed economies.

The report, which has covered 50 countries whose gross domestic product accounts for 90 per cent of the world's total economy, gave markedly different valuations to 27 countries compared with those given by Dagong's three Western rivals.

It gave its own government a higher debt rating than the US, Britain and Japan, and stripped Britain, the US, Germany and France of their AAA ratings.

Guan said credit ratings offered by the three agencies have caused controversy because of their lack of an independent, impartial, objective and scientific perspective. The three agencies declined to comment on his claims.

He pointed to the fact that the AAA ratings given by the global top trio to toxic mortgage-backed securities all turned to junk when the US housing market collapsed, prompting the global meltdown.

'The Western rating companies do not adhere to objective standards,' Guan said, claiming that his privately held, 16-year-old company's methodology reflected a more objective view of a government's fiscal strength and stability.

He added Dagong's methodology had been developed over the past five years and reflected a more objective assessment of governments' fiscal position, ability to govern, economic power, foreign reserves, debt burden and ability to create future wealth.

Guan cited a series of comprehensive factors, such as a country's GDP growth trends and potential, its foreign trade, international balance of payments, foreign reserves, foreign debt and its structure, fiscal revenues and financial policies that influence a country's debt-repayment capability.

The company is ambitious, and has a six-year plan to make itself a global player.

Under the plan, put into action in 2008, the company is aiming at completing its credit-rating standards and becoming the lead player in the domestic market and in Asia by 2011, and making the mainland a major player in the global financial market by 2014.

The company now tops credit-rating agencies at home and its leading status is recognised by the government.

The mainland has the world's biggest stockpile of foreign-exchange reserves, which reached a record US$2.454 trillion at the end of last month.

It is the single largest holder of US treasury bonds and also the most significant holder of European sovereign debt, though no detailed data has been released.

At last month's Group of 20 summit in Toronto, President Hu Jintao urged adoption of 'an objective, fair, reasonable and uniform method and standard for sovereign credit ratings' that could better reflect a country's economic strength.

While Dagong is privately owned, analysts have questioned the fact that its first sovereign debt report was launched at the headquarters of Xinhua, the Communist Party's main propaganda outlet.

Guan said it was just a coincidence. 'We invited Xinhua to send their reporters to cover the launch, and its management staff suggested that using its headquarters would be more convenient for both domestic reporters and foreign outlets in Beijing.

But Xinhua published an editorial about credit ratings on the day of Dagong's launch, triggering speculation of links between the rating agency and the Chinese government.

Under the headline 'China must have its say in financial matters', the agency said the mainland suffered greatly from the American mode of credit rating. 'Given today's financial globalisation and internationalisation of creditor-debtor relations, having one's say in credit ratings has unparalleled influence on a country's core interests,' it said.

Guan was a government official with the former ministry that became the China National Space Administration. He became an investment banker with a financial house and then Dagong chairman in 1998. He has many official and semi-official titles, such as president of the Credit Committee of China Information Industry Association.

Last week, Guan was named chairman of the China Securities Credit Rating Committee to provide credit-rating services to the country's securities industry.

He said its advice is impartial, citing the company's slogan: 'Value nothing but truth, credit and impartiality.'

Guan said his company has applied to the US Securities and Exchange Commission for recognition as a ratings agency.