NEVER in the history of East Asia have its banks, corporates and sovereigns been deluged by so many opinions on their deposit base, asset quality, debt-to-equity ratios, stability and plain down-to-earth creditworthiness. News that entities in the region had strong cash flows and were going to be hitting international markets for cash has attracted the major rating agencies to set up shop in Hong Kong and start issuing reports. The trouble is some of the ratings have rocked the market - the Bank of China, a note-issuing bank and one of the territory's biggest, was forced to cancel a record-breaking HK$5 billion bond issue earlier this year after its rating was slashed. Last week, Moody's Investors Service belatedly downgraded China International Trust and Investment Corp to Baa1 from A3, almost six months after downgrading four mainland banks, including Bank of China, to Baa1 from A3. This affects Hong Kong, because after 1997 China's rating could act as a drag on Hong Kong's blue chips. Other banks and corporates in the region have objected to low ratings passed out by the agencies. Ratings run from the top grade of AAA from Standard & Poor's (or Aaa from Moody's Investors Service) to S&P's D rating and Moody's C for the very worst borrowers. The better a country or corporate's rating, the cheaper it is to borrow funds domestically or internationally. A low rating translates to higher risk, which means investors will demand a higher rate of interest in compensation. There are other more specialised rating agencies such as IBCA and Thomson BankWatch, which tend to focus on banks rather than sovereign credits or corporates. But just who are these agencies, and why do their verdicts on the quality of a country or corporate carry such weight? The rating system in its current form started with John Moody, founder of a newsletter which grew into Moody's Investors Service. Mr Moody published the world's first bond ratings in 1909 when he published a handbook of financial analyses on American railways. The handbook included relevant statistics and credit analysis on each of the 250 major railways in the United States at the time. To provide readers with easy comparisons of the securities, he assigned ratings to each company's outstanding securities, which covered over 1,000 bonds. The rest is history, and his rating system remains the benchmark. He soon extended his system to utilities, industrial companies and municipal bonds, and by 1918 he was rating the Yankee bonds - a Yankee bond is a US dollar bond issued in the US by a non-US borrower - of borrowers ranging from China to France and Germany. The rating system became popular after the Great Depression, when issuers of bonds started defaulting on US bond obligations, making clear the need for some arms-length system of measuring credits. In the 1970s and 1980s, the issuance of rated bonds multiplied as the bond market grew more than tenfold. Now, the system is well established. Certain investors, such as pension funds, will only invest in issues with ratings above a certain level, putting pressure on regular borrowers to keep their balance sheet in good shape so they can win top grades from the agencies. As it is, few countries win top ratings from either of the big agencies, Moody's and S & P. For example, only nine countries have Moody's Aaa ratings for foreign currency debt, the hardest one to sustain: Austria, France, Germany, Japan, Luxembourg, the Netherlands, Switzerland, Britain and the US. Sometimes the agencies differ - while S & P upgraded Singapore's senior long-term debt to AAA in March, Moody's still rates Singapore Aa2, two notches from the top. S & P rates China BBB for foreign currency long-term debt, against Moody's A3. S & P rates Hong Kong A for long-term foreign currency debt, against Moody's A3. Both of the major agencies differ in their predictions for the future, particularly where Hong Kong and China are concerned. Former Financial Services Secretary, Michael Cartland, has called for the rating agencies to recognise that Hong Kong's rating should not be affected by the change of sovereignty in 1997. 'The nearer we get to 1997 the more apparent it becomes that the foundations for the future of Hong Kong are in place, that the economy continues to perform well and that the markets are not going into terminal decline,' he said. 'In short, one country two systems can and should mean one country two ratings - separate ratings to reflect the different strengths of the two separate economies.' This is important to Hong Kong, because the higher its rating, the higher the rating available to individual corporates and banks within the territory - a sovereign rating acts as a 'ceiling' for entities from that country. Mr Cartland's successor, Rafael Hui, echoed the call last week. Some of the agencies agree with Mr Cartland and Mr Hui. Leo O'Neill, S & P president and chief rating officer, said there was no reason why 1997 should not translate into 'one country two systems - one country two ratings'. In other words, Hong Kong can have a higher rating than China, even when it becomes a special administrative region (SAR) of China. Normally, the absolute ceiling for ratings in a country is that of the government. After 1997, that will be China. The Japan Bond Research Institute (JBRI) subscribes to Mr Cartland's view. In May it said it had decided to consider Hong Kong's post-July 1, 1997, sovereign ceiling rating as independent from that of China (it rates China AA-minus). It would also set Hong Kong's pre and post-return (to Chinese rule) both at AA. No agency is as bullish on the territory's future. It issued its first report on Hong Kong and said China was not going to ruin Hong Kong by trying to remake the territory. IBCA said the issue boiled down to two basic questions: 'The first is whether Hong Kong will continue to deserve to retain a separate credit rating to that of mainland China, even though China will become the sovereign power on July 1, 1997. 'If the answer to that question is, as we argue, that it should be rated separately, then the second question is the extent to which Hong Kong's creditworthiness exceeds the creditworthiness of mainland China. 'On this question we argue that Beijing's guarantees in the joint declaration of 1984 and in the Basic Law of the Hong Kong Special Administrative Region justify a higher rating than China on political grounds, while Hong Kong's continued economic strengths also justify a higher rating on economic grounds.' But Moody's disagrees with Mr Cartland. The agency has made it clear that it believes the ratings of both China and Hong Kong will 'converge'. In a comment in May this year, Edward Young, Moody's Hong Kong managing director, and Vincent Truglia, a senior analyst with its sovereign ratings unit, said Hong Kong's A3 rating reflected its increasing integration with China. That is ominous, suggesting that unless China can be upgraded from its current A3, Hong Kong will be stuck at the same rating, even though its economic fundamentals rival many countries with higher ratings. A top Moody's official put it even more bluntly last year. 'In principle, the closer the integration, the more likely the rating will become single for Hong Kong and China,' said vice-president Guillermo Estebanez.