[THS] Financial Times: China rating agency condemns rivals

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http://www.ft.com/cms/s/0/5632a0b8-94b7-11df-b90e-00144feab49a.html

The Financial Times

China rating agency condemns rivals

By Jamil Anderlini in Beijing

Published: July 21 2010 16:22 | Last updated: July 21 2010 16:22

The head of China’s largest credit rating agency has slammed his western
counterparts for causing the global financial crisis and said that as the world’s largest
creditor nation China should have a bigger say in how governments and their debt
are rated.

“The western rating agencies are politicised and highly ideological and they do not
adhere to objective standards,” Guan Jianzhong, chairman of Dagong Global Credit
Rating, told the Financial Times in an interview. “China is the biggest creditor nation
in the world and with the rise and national rejuvenation of China we should have our
say in how the credit risks of states are judged.”

On the corporate side, Mr Guan argues Moody’s Investors Service, Standard & Poor’s
and Fitch Ratings – the three companies that dominate the global credit rating
industry – have become too close to the clients they are supposed to be objectively
assessing.

He specifically criticised the practice of “rating shopping” by companies who offer
their business to the agency that provides the most favourable rating.

In the aftermath of the financial crisis “rating shopping” has been one of the key
complaints from western regulators , who have heavily criticised the big three
agencies for handing top ratings to mortgage-linked securities that turned toxic when
the US housing market collapsed in 2007.

“The financial crisis was caused because rating agencies didn’t properly disclose risk
and this brought the entire US financial system to the verge of collapse, causing
huge damage to the US and its strategic interests,” Mr Guan said.

Recently, the rating agencies have been criticised for being too slow to downgrade
some of the heavily indebted peripheral eurozone economies, most notably Spain,
which still holds triple A ratings from Moody’s.

There is also a view among many investors that the agencies would shy away from
withdrawing triple A ratings to countries such as the US and UK because of the
political pressure that would bear down on them in the event of such actions.

Last week, privately-owned Dagong published its own sovereign credit ranking in
what it said was a first for a non-western credit rating agency.

The results were very different from those published by Moody’s, Standard & Poor’s
and Fitch, with China ranking higher than the United States, Britain, Japan, France
and most other major economies, reflecting Dagong’s belief that China is more
politically and economically stable than all of these countries.

Mr Guan said his company’s methodology has been developed over the last five years
and reflects a more objective assessment of a government’s fiscal position, ability to
govern, economic power, foreign reserves, debt burden and ability to create future
wealth.

“The US is insolvent and faces bankruptcy as a pure debtor nation but the rating
agencies still give it high rankings ,” Mr Guan said. “Actually, the huge military
expenditure of the US is not created by themselves but comes from borrowed money,
which is not sustainable.”

A wildly enthusiastic editorial published by Xinhua , China’s official state newswire,
lauded Dagong’s report as a significant step toward breaking the monopoly of
western rating agencies of which it said China has long been a “victim”.

“Compared with the US’ conquest of the world by means of force, Moody’s has
controlled the world through its dominance in credit ratings,” the editorial said.

First established in 1994, Dagong signed a three-year “technology co-operation”
agreement in 1999 with Moody’s, which provided the Chinese company with its “core
knowledge” and its first “systemic understanding”, according to Mr Guan.

In fact, Dagong is more similar to its three global competitors than it might like to
admit.

Dagong’s share of China’s fledgling credit rating market is around 25 per cent, while
subsidiaries of the big three global agencies control most of the rest.

Dagong’s next goal is to break into the international market, starting with the US.

But even if the company can overcome reluctance from US regulators it may have a
hard time convincing international clients that it is more objective than its western
peers, especially considering the overtly nationalistic tone it strikes at home.

Additional reporting, David Oakley in London