Business / Markets

Credit rating system said to cut risk

By Zheng Yangpeng ( Updated: 2014-03-26 17:23

Beijing-based Dagong Global Credit Rating Co, a major domestic credit company, released its guiding principles for credit rating on Tuesday, putting "wealth creation capacity" at the center of evaluating debtors' solvency.

Dagong has long set itself apart from major Western credit raters, saying it is committed to building an independent rating system that avoids encouraging irresponsible credit expansion.

The biggest innovation in its credit rating principles, Dagong said, is that it sets debtors' ability to earn as the cornerstone of the system, while it also measures how far past repayment activity has deviated.

According to this theory, a debtor can repay a debt through various sources, including its profits, business revenues, other debts, liquidation of assets or external guarantees. Although all sources could be used to repay a debt, they are linked with different levels of risk.

"There is apparently a big difference if a company repays its debt by revenue or by new debts. The latter has a much higher risk. Dagong's system will reflect the difference," Guan Jianzhong, chairman of Dagong, said at a news conference on Tuesday.

Guan criticized mainstream Western credit rating practices, saying they are based on "default possibility", a system that is "deeply flawed" and which has misled investors and contributed to the outbreak of the global financial crisis.

This is what motivated him to set up Dagong's own credit rating system, in an effort to challenge Western firms' dominance, he said.

The guiding principles are followed by specific methodologies that Dagong has not yet made public. The company said it will release its methodologies in coming months.

Credit rating system said to cut risk

Credit rating system said to cut risk

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