Opinion

Toward a fair ratings system

By Deng Yuwen (China Daily)
Updated: 2010-07-19 15:35
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More agencies should be set up in developing nations to break the West's monopoly over the global credit ratings business

A recent report by Dagong Global Credit Rating Co Ltd on the world's sovereign credit status and its risks, is a significant step by a non-Western entity to break the long-established monopoly of Western ratings agencies over the global credit ratings business.

The report by China's first domestic ratings agency covered 50 countries whose gross domestic product (GDP) accounts for 90 percent of the world economy, and evaluated 27 countries differently from how Western rating agencies such as Moody's, Standard & Poor's (S&P) and Fitch have been doing.

In its report, Dagong gave some emerging and well-performing economies higher ratings than the three Western rating giants did. It also gave a comparatively lower rating to those slow-growing developed countries that have been bogged down in economic and debt troubles.

Due to its good economic performance in the context of the global financial crisis, China received a higher credit rating than the United States and some other Western countries, chiefly due to their worsening deficits.

China's local-currency rating was AA+ and foreign currency rating AAA, according to the Dagong report, both higher than those given by Moody's, S&P and Fitch. In its report, Dagong rated the US "AA" with a negative outlook both in its local as well as foreign currency.

In its report, Dagong mainly based its credit ratings criteria on different countries' comprehensive institutional strength and their fiscal conditions, with the former reflecting an economic entity's ability to guarantee wealth creation, an index that indicates its potential to create wealth and fiscal revenues in future, according to a manager of the agency's risks evaluation department.

Fiscal conditions reflect an economic entity's funding fluidity in future through comparing its revenues and debt status.

Dagong rated the 50 countries according to its own credit rating standards, which include the ability to govern a country, economic power, financial ability, fiscal status and foreign reserves, according to Guan Jianzhong, chairman of the non-governmental ratings agency.

Undoubtedly, China's current political and economic institutions ensure that it has far higher ability than the US in wealth creation and revenue collection. Beijing's fiscal conditions are also much better than Washington's, not just now but also likely in the years ahead.

A comparison between the two countries' GDP growth trends, foreign trade, international balance of payments, foreign reserves, their foreign debt and its structure, fiscal revenues and financial policies, all factors that influence a country's debt repayment ability, easily helped draw these conclusions.

Dagong's report is expected to help break the long-established monopoly of Moody's, S&P and Fitch over the global credit ratings market. For a long time, the credit ratings offered by the three have caused controversies across the world due to their lack of an independent, impartial, objective and scientific perspective.

Also, US values and standards have been mainly used to evaluate other countries' sovereign debt as well as those of their enterprises. This has not only resulted in their repeated failure to issue a necessary alert in a timely and accurate manner but has also contributed much to global financial turbulences.

There exists two super-hegemonies in the current world, with one being the US and the other Moody's, a US politician once put it. Compared with the US' conquest of the world by means of force, Moody's has controlled the world through its dominance in credit ratings.

Related readings:
Toward a fair ratings system China unveils first sovereign credit rating report
Toward a fair ratings system Gold turns higher as Fitch downgrades Spain's credit rating
Toward a fair ratings system Credit rating agencies: crises catalysts?
Toward a fair ratings system S&P cuts Japan credit rating outlook

Credit ratings agencies are a new hegemony in the post-Cold War period, a New York Times editorial once pointed out. That could explain why the European Union felt anger at Moody's, S&P and Fitch and announced that it would set up its own ratings agency after the three US-led agencies rated the Greek sovereign credit as junk, a rating that caused Greece's crisis to spread to the rest of the european continent.

China has also been a victim of the three ratings agencies. At a time when China launched accelerated efforts to list some domestic banks in overseas markets in 2003, S&P turned a blind eye to the country's fast and sustainable economic growth and announced that it would maintain its BBB-grade rating of the country's sovereign debt, the minimal level "suitable for investment".

It also gave 13 Chinese commercial banks a junk rating. S&P, together with Moody's and Fitch, even gave China's sovereign debt a lower credit rating than debt-plagued Spain.

To reform the West-dominated international financial order, more credit ratings agencies should be set up in non-Western countries to break Western 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. However, China still has a long way to go before it can increase its own influence in its credit ratings system given that the country still faces huge difficulties in expanding the authority of its fledgling credit ratings agency and letting its ratings report be accepted by the international community.

As its economic strength grows further, China's credit ratings agency is expected to win a proportionate international status. What the country should do now is to map out the development layout for its credit ratings system as soon as possible and make related laws and regulations in a bid to offer institutional support for the country's pursuit of a deserved voice in the international financial market and the power to make international financial rules.

The author is a senior editor with the Study Times.