Home » Opinion » Chinese Views
New ratings firm challenges US for credibility
By Sun Lijian |
July 23, 2010, Friday
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Print Edition
Print Edition
FOR a long time, the right to rate the debts of economies had been exclusive to the three leading US ratings agencies, namely, Moody's Investors Service, Standard & Poor's and Fitch Ratings.
Not any more. In a departure from the routine practice of hiring the Big Three to do their job, China recently commissioned Dagong Global Credit Rating Co, a little-known domestic rater, to produce its first sovereign ranking report of credit ratings for 50 economies.
This move, along with China's bid to elevate the yuan's global status, indicates that the country is becoming more assertive in its quest for financial leadership in the world.
The American Big Three had been on a roll until the global financial tsunami undid much of the public's confidence in them.
They blundered badly in assigning higher ratings to problematic derivatives - which became worthless after bubbles burst - than they merited.
Blinded by the presumed authority and credibility of the established ratings agencies, investors neglected the safety of their US bonds. The price they paid: most or all of their fortunes were wiped out.
With this in mind, China's reason for commissioning credit ratings from its own domestic raters can be understood in this light: Having been subject to the whims of the US Big Three, the country wants desperately to mitigate the risks stemming from information asymmetry in credit ratings, and in particular, to avoid becoming a victim of potential irregularities of US raters, which may conceal flaws and shortcomings in American financial products in exchange for favors, such as bigger market share.
The Greek debt crisis again revealed the measure of the Big Three's willfulness and arrogance in the timing of the issuance of their ratings reports.
While Euro zone governments were busy preventing a member state's debt fiasco from evolving into a continental debacle, the trio compounded their woes by downgrading the bond ratings of a few indebted European countries to "junk" status.
Subsequently, it became intolerably costly for these nations to access funds to make debt repayments.
China's decision to play by its own rating rules might, to some extent, lend objectivity and credibility to ratings services, which so far have been dominated by the US triopoly.
In designating its domestic agencies to do the ratings work, it not only distances itself from the double standards US firms frequently applied to foreign markets, but also makes its financial system more resilient to external financial adversity.
The presence of China's homegrown ratings agencies is also conducive to the betterment of services provided by their US counterparts.
Having operated for years without facing any serious competition, US raters have little incentive to improve the accuracy of their ratings and update their methodology as new risks emerge.
In this sense, the promotion of Dagong as China's ratings agency of choice is in the country's best economic interests. Besides, it is also a boon to the general efficiency and quality of global ratings services.
For Dagong, however, global recognition is a long way off. To attain it, there are several steps the newcomer may consider.
First, it will definitely make a name for itself by announcing accurate ratings at the right time.
Compared with US agencies' sometimes fraudulent ratings, Dagong offers a less biased alternative that investors can refer to while directing their money flow.
Second, Dagong's chances of achieving wide recognition will be augmented with the gradual opening of China's financial market. It will be easier for the outside world to accept Chinese ratings standards if foreign companies are allowed to invest in China's securities.
Third, if the talent pool of trained financial professionals keeps expanding, and China's ratings agencies can be cosmopolitan and eclectic in setting their standards, they will likely be rewarded with their rightful place in the financial arena for the quality services they render.
(The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)
Not any more. In a departure from the routine practice of hiring the Big Three to do their job, China recently commissioned Dagong Global Credit Rating Co, a little-known domestic rater, to produce its first sovereign ranking report of credit ratings for 50 economies.
This move, along with China's bid to elevate the yuan's global status, indicates that the country is becoming more assertive in its quest for financial leadership in the world.
The American Big Three had been on a roll until the global financial tsunami undid much of the public's confidence in them.
They blundered badly in assigning higher ratings to problematic derivatives - which became worthless after bubbles burst - than they merited.
Blinded by the presumed authority and credibility of the established ratings agencies, investors neglected the safety of their US bonds. The price they paid: most or all of their fortunes were wiped out.
With this in mind, China's reason for commissioning credit ratings from its own domestic raters can be understood in this light: Having been subject to the whims of the US Big Three, the country wants desperately to mitigate the risks stemming from information asymmetry in credit ratings, and in particular, to avoid becoming a victim of potential irregularities of US raters, which may conceal flaws and shortcomings in American financial products in exchange for favors, such as bigger market share.
The Greek debt crisis again revealed the measure of the Big Three's willfulness and arrogance in the timing of the issuance of their ratings reports.
While Euro zone governments were busy preventing a member state's debt fiasco from evolving into a continental debacle, the trio compounded their woes by downgrading the bond ratings of a few indebted European countries to "junk" status.
Subsequently, it became intolerably costly for these nations to access funds to make debt repayments.
China's decision to play by its own rating rules might, to some extent, lend objectivity and credibility to ratings services, which so far have been dominated by the US triopoly.
In designating its domestic agencies to do the ratings work, it not only distances itself from the double standards US firms frequently applied to foreign markets, but also makes its financial system more resilient to external financial adversity.
The presence of China's homegrown ratings agencies is also conducive to the betterment of services provided by their US counterparts.
Having operated for years without facing any serious competition, US raters have little incentive to improve the accuracy of their ratings and update their methodology as new risks emerge.
In this sense, the promotion of Dagong as China's ratings agency of choice is in the country's best economic interests. Besides, it is also a boon to the general efficiency and quality of global ratings services.
For Dagong, however, global recognition is a long way off. To attain it, there are several steps the newcomer may consider.
First, it will definitely make a name for itself by announcing accurate ratings at the right time.
Compared with US agencies' sometimes fraudulent ratings, Dagong offers a less biased alternative that investors can refer to while directing their money flow.
Second, Dagong's chances of achieving wide recognition will be augmented with the gradual opening of China's financial market. It will be easier for the outside world to accept Chinese ratings standards if foreign companies are allowed to invest in China's securities.
Third, if the talent pool of trained financial professionals keeps expanding, and China's ratings agencies can be cosmopolitan and eclectic in setting their standards, they will likely be rewarded with their rightful place in the financial arena for the quality services they render.
(The author is executive vice dean of the School of Economics at Fudan University. Shanghai Daily staff writer Ni Tao translated and edited his article originally written in Chinese.)
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