Mainland rating agencies in no place to criticise foreign peers
The boss of China's leading credit rating agency caused a stir last month when he slammed the big three international agencies for issuing ratings that are biased, inaccurate and misleading.
Determined to make a splash, Dagong Global Credit Rating published its own list of sovereign ratings for 50 countries, reckoning China more credit-worthy than traditionally AAA-rated borrowers like Britain, France and even the United States.
Guan Jianzhong's comments and his agency's report may have made a major splash in the world's media, but among debt market professionals they raised more wry smiles than ripples of disquiet.
That's not because anyone disagrees with his remarks about the established ratings agencies. The big three severely blotted their collective copy book by helping Wall Street banks to re-package toxic subprime debts as investible securities with top-notch credit ratings, and then failing to warn investors about the risks.
(To be fair, much of the industry outrage at the agencies' failures smacks of scapegoating. Everyone has known for years which side the agencies' bread was buttered, and their inability accurately to forecast financial crises was amply demonstrated in Asia back in 1997. As a result, any asset manager who attempts to excuse losses by saying he thought his investments were sound because they were rated AAA by Moody's or Standard & Poor's clearly doesn't deserve his salary, let alone a fat bonus.)
But back to Dagong: no, the smiles were a response not to the nature of the criticism, but to the identity of the critic. Moody's, Standard & Poor's and Fitch have their faults, but their Chinese counterparts are a hardly a byword for independent and objective analysis.
As mainland issuers are well aware, if political connections cannot secure them the high-grade rating they need, they can simply shop around among the different competing domestic agencies until they achieve their desired rating. After all, the issuer is the paying client, not the investors, and what would be seen across much of the world as a compromising conflict of interest is often regarded in China as a crucial competitive advantage. So for a Chinese rating agency to criticise its international peers for dubious standards is a classic case of the pot calling the kettle black.
Similarly, Dagong's decision to award China a stronger local currency credit rating than the US elicited a few hearty chuckles. On Dagong's list, China ranked alongside Canada, the Netherlands and Germany with a respectable AA-plus, up from A-plus from Standard & Poor's. In contrast, the US merited only a lowly AA rating by Dagong's reckoning.
While perhaps it isn't surprising that a Chinese agency should feel moved to rate Beijing's creditworthiness more highly than its foreign peers do, the decision is still questionable.
No one doubts the deterioration in the US fiscal situation since the beginning of the financial crisis, as monster deficits have pushed the ratio of public debt to gross domestic product up to almost 100 per cent. And no one underestimates the severity of the long-term fiscal burden facing the US, given ever-expanding health care costs.
Instead, it is the analysis of Beijing's relative financial strength that looks weak. With an official government debt to GDP ratio of around just 20 per cent, on the surface Beijing looks to be in fine financial fettle.
But once you start adding in off-balance sheet liabilities, the picture changes rapidly. Factor in the eight trillion yuan (HK$9.17 trillion) to 10 trillion yuan local governments have borrowed to fund infrastructure investments, about four trillion yuan in bad debts inherited from the last time the government went on an infrastructure binge back in the late 1990s, and another two trillion yuan or so in unfunded pension liabilities, and you soon get a public debt to GDP ratio in excess of 60 per cent.
Granted, that's quite modest compared with the US level, but it's comparable to the ratio in Britain, a country that Dagong also rated one notch below China for credit worthiness.
And for an emerging economy with a relatively undeveloped financial system, a government debt to GDP level of more than 60 per cent is clearly approaching the danger zone.
Chinese ratings agencies, it seems, are just as bad as their western counterparts after all.