China ratings firms challenge US dominance

Triple A letters with a backdrop of Euro notes Credit ratings play a key role in influencing the borrowing costs of countries and corporations

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Chinese ratings agencies are setting up ventures overseas, challenging the stranglehold the "Big Three" US-based firms have on the market for assessing the creditworthiness of the world's governments and corporations.

Standard & Poor's, Moody's and Fitch play a key part in determining how investors allocate billions of dollars and the ability of governments to borrow.

However, their role in global finance has drawn criticism in the wake of the 2008 financial crisis and Chinese agencies say they want to offer an alternative voice.

Beijing-based Dagong Global Credit Rating last week announced a joint venture with Egan-Jones, a small US agency, and Russia's RusRating, which has lofty plans to construct a new international credit rating system that "reflects the laws governing the development of our credit-based economy and stands for the common interests of mankind".

The venture, to be called Universal Credit Ratings Group, will be headquartered in Hong Kong.

It will join China Chengxin, the country's oldest rating agency, which opened an international unit in the former British territory in August.

"We believe that investors would like to see more choices," says Chengxin's managing director Philip Li.

'First niche'

Speaking from his newly occupied Hong Kong office in the city's financial district, Mr Li says Chengxin's international expansion will start small.

The company will begin by assessing the debt issued by Chinese companies in Hong Kong, using its connections to Chinese corporations in an attempt to get an edge over its international counterparts.

Start Quote

The clear position of protecting the interests of the largest debtor country has deprived the current rating system of the due independence”

End Quote Guan Jianzhong Dagong Global Credit Rating

He also believes that non-Chinese companies issuing debt in Hong Kong will want a Chengxin rating to appeal to Chinese investment funds that are beginning to look beyond their own borders.

"This is our first niche," he says. "In China, we have already rated over 9,000 corporations and banks over the past 20 years so I think Chinese investors would like our name appear on the bonds, as well as an international agency."

Keen to distinguish itself, Mr Li says the international unit will adopt a different approach from its parent company.

Broadly speaking, he says, Chinese ratings agencies pay more attention to "qualitative analysis" - focusing on things like government policy, the political environment and business management - rather than the hard-number crunching of an entity's financial performance.

For example, a Chinese company that is not profitable may still receive a solid credit rating because it is perceived to have state-backing and thus receive a government bail-out if anything goes awry.

"In the international market, international investors may not emphasise the qualitative analysis," he says.

Like Moody's, Fitch and S&P, Chengxin makes its money from fees paid by the corporation issuing debt.

Critics of this model say it generates a conflict of interest and ratings agencies have been widely faulted for not predicting the global financial crisis.

Rating system independence?

Dagong's venture has more ambitious, arguably politically-charged goals.

It hopes to create a "multilateral, independent and international" agency to challenge the dominance of the Big Three in what it described as a "great cause" and accused them of serving the interests of the US government.

CREDIT-RATING AGENCIES

  • Private-sector firms that assign credit ratings for issuers of debt
  • A credit rating takes into account the debt issuer's ability to pay back its loan
  • That, in turn, affects the interest rate applied to the security (eg, a bond) being issued
  • A credit downgrade can make it more expensive for a government to borrow money

"The clear position of protecting the interests of the largest debtor country has deprived the current rating system of the due independence," said Guan Jianzhong, president of Dagong Global Credit Rating.

"The level of impartiality of credit rating determines the future of the world economy."

Dagong first garnered attention when it downgraded the US government's sovereign rating in 2010, a year before S&P followed suit. It has also been refused permission to operate in the US.

However, according to reports, it has since come under scrutiny at home for giving a top rating to the debt-laden and corruption tainted Railways Ministry.

Dagong gave few details of what kind of business model the venture would use, giving it a time-frame of five years to formulate a new international credit rating system.

'Long march'

Observers say that it will take time for Chinese credit ratings agencies to be accepted by mainstream investors.

"I call this a transition. They need to come to the outside world to learn what the global market practice is," said Sean Chang, head of Asian debt investment at Barings Asset Management.

Another fund manager, who declined to be named, said that many large Chinese investment houses relied on their own internal credit research because domestic agencies operated in a politicised area and were under pressure to give state-related enterprises a high rating.

Guan Jianzhong of Dagong Global Credit Rating Chinese ratings agencies say they want to provide an alternative voice

Noritaka Akamatsu at the Asian Development Bank said that the technical and analytical skills of the region's local credit agency were good, but there were questions over some Chinese ratings agencies' independence.

"Most entities tapping bond markets in China are connected to the state, so they are rated AA to AAA across the agencies based on the domestic standards. This reduces the value of the ratings," he said.

Criticism has also come from within China, with the unusual number of high ratings catching the attention of the state-backed regulator. According to financial publication Caixin, a report from the National Association of Financial Market Institutional Investors in August found that bond ratings were detached from the real economy.

These factors are not lost on Mr Li at Chengxin, a Hong Kong financial veteran who acknowledges there are big hurdles to surmount before his company is a truly recognised global player.

"We understand this is a long march," he says.

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