Specials

China's debut in credit rating

(chinadaily.com.cn)
Updated: 2010-07-23 11:32

What does a rating agency do?   It evaluates a potential borrower's ability to repay debt, by calculating its financial history and current assets and liabilities. Or simply, it seeks to answer, "Is your borrower able to pay back?"

Editor's Note: Beijing-based Dagong Global Credit Rating Co released its first credit rating report on 50 countries on July 11, slamming its Western counterparts – most notably "the Big Three" monopoly: Moody's, Standard & Poors and Fitch -- for causing the global financial crisis. The move is perceived by many as a major step by China, the world's biggest creditor and third-largest economy, in seeking global financial clout equivalent to its swelling economic might.

Financial regulators had criticized the Big Three agencies for glossing mortgage-linked securities before the US housing market collapsed in 2007. Recently, the Big Three have been rapped for being too slow to downgrade heavily indebted EU economies, most notably Greece and Spain. The problem, in plain words, is that the agencies didn't fully reveal how risky the investments were, until it was too late. Let's hear some ideas from a few influential political and opinion leaders.

Thomas L. Friedman, a New York Times columnist

At an interview in 1996, Friedman said, "There are two superpowers in the world today in my opinion. There's the United States and there's Moody's Bond Rating Service. The United States can destroy you by dropping bombs, and Moody's can destroy you by downgrading your bonds."

George LeMieux, US senator and Republican from Florida

During a Senate debate in May, LeMieux said, "We know that one of the main reasons why we had our financial debacle in 2008 was that credit agencies failed to do their jobs. They put AAA stamps of approval on products that deserve no such stamp."

French President Nicolas Sarkozy and German Chancellor Angela Merkel

In an open letter to France's Le Monde on May 6, Merkel and Sarkozy set out several initiatives to stabilize financial markets, including a clampdown on credit rating agencies, asking the EU to "consider the role of the ratings agencies in the spreading of crises."  

 

Jose Manuel Barroso, EU Commission president

Barroso spoke to media in Brussels on July 2, asking, "Is it normal to have only three" from the same country giving ratings "on such a sensitive issue?"

 

Dagong's credit rating debut seeks to break the monopoly of Moody's, Standard & Poors and Fitch, which not only overrated the mortgage-related investments, leading to the global financial crisis, but also failed to give full credit to China's economic strength, thus increasing China's borrowing costs. Dagong's sovereign credit rating standards, different from the Big Three, include the country's governing ability, economic power, financial ability, fiscal status and foreign reserve.

Ratings game up for grabs

Just like Beijing's efforts to internationalize its currency, this move symbolizes another major step by China toward increasing its influence in the global financial market and acquiring global financial dominance. Previously, credulous Chinese investors had lost money in purchasing so-called "top-notch" financial products. Thus Dagong's debut has not only safeguarded China's own economic interests, but has also contributed to global efforts aimed at improving credit rating efficiency and quality.

Toward a fair ratings system

Dagong's report is expected to help break the long-established US monopoly over the global credit ratings market, of which China has also been a victim. To reform the West-dominated international financial order, more credit ratings agencies should be set up in non-Western countries to break the monopoly over the global credit ratings business. Dagong's recent report signals China's efforts to participate in making new rules for international ratings and to seek a larger say in this area. As its economic strength grows further, China's credit ratings agency is expected to win a proportionate international status.

Greater financial say 

The lack of international rating rights has robbed China of the exchange rate of its own currency in the international market. As the largest creditor to the US, China suffered from the US-dominated rating system because it didn't have the necessary ability to protect its financial and fiscal rights.