In These New Times

A new paradigm for a post-imperial world

China takes on the big three ratings agencies

Posted by seumasach on January 25, 2012

With the recent downgrading of the credit ratings of nine euro zone nations by Standard and Poor’s – including the cherished triple-A rank for France – the big three ratings agencies have not been winning new friends.

And the latest salvos have been fired from a rather unexpected quarter, China, whose own fiscal strength (as we saw here yesterday) is the envy of much of the world.

Along with S&P, Moody’s and Fitch control more than 90 per cent of the international credit rating market – a dominance that is beginning to irk Beijing.

The Chinese central bank governor, Zhou Xiaochuan, aka Mr Renminbi and Euromoney’s Central Banker of the Year, is among those unhappy with the big three.

Mr Zhou warned Chinese companies to rely less on the credit assessments of the three giants and urged them to do more of their own due diligence.

“When a company runs into trouble, its credit rating will be ruthlessly downgraded. However, there are no insightful assessments before the problems eventuate. They only amplify the best and the worst of the subject of credit assessment and exacerbate the development of the crisis,” said Mr Zhou, according to a report by China Newsweek.

Mr Zhou also advocated a more active Chinese participation in the setting of international rules. He said the existing playbook had been made by developed Western countries and developing nations had no choice but to follow these rules.

However, China’s population and economic size now demanded it be heard on the international stage.

The report also took a snipe at the big three agencies’ role in the global financial crisis, criticising their triple-A rating of subprime mortgage products as “modern financial magic”.

Enter the Dagong

Guan Jianzhong, the chief executive of China’s best known domestic ratings agency, Dagong Global Credit, is joining in the call for an overhaul of the international credit ratings regime. Somewhat self-interestedly, of course.

Mr Guan said a global economic recovery was only possible on the back of an international credit ratings reform.

He suggested the creation of a global credits rating system with a uniform standard reflecting the interests of all the members of the international community.

“The new system should comprise a credit agency from every country nominated by its regulatory authority. These rating agencies should work together to create a set of uniform rules,” Mr Guan told Sina Finance News, a Chinese news site.

In addition, he also urged the creditors (read China, the largest holder of US foreign debt) to establish an international supervisory committee.

This new body would eventually become an alternative credit ratings system to that of the current system dominated by the big three.

Making waves

Dagong made headlines in 2010 when it published its inaugural report on global sovereign debt risks, the first by a non-Western ratings agency.

The most controversial feature of the report was its assessment that the debt risk of the US was higher than that of China – a judgment that jarred with the consensus among the big three that US government debt was the safest in the world.

For what it’s worth, Dagong rated Australia with a coveted triple-A. (That made it four out of four.)

Dagong, though, is not above criticism itself. It’s been criticised in China for its credit rating of the heavily indebted Ministry of Railways, which scored higher than China’s sovereign credit rating. The call was an apparent breach of the international norm that a company can never score higher than its sovereign.

Euro zone members are also considering setting up their own ratings agency and in fact, the Committee on Economic and Monetary Affairs of the European Parliament is holding a meeting today to discuss the very topic.

The credit ratings wars have just begun.

Peter Cai is BusinessDay’s Asian affairs reporter.

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