Credit Ratings in China and the World
Last week I was interviewed by Agence France Presse about my thoughts on Dagong, the Chinese credit ratings agency, that last week gave a press conference about its plans to revolutionize the credit ratings world. Before I give my specific thoughts, I want to emphasize a couple of things.
First, I am not writing this because I feel I was misquoted in anyway, only that I want to add more detail to my thoughts. I have been lucky to work with journalists that I feel are trying to accurately represent my opinion and better understand a story, this is no different. Second, I am not in any way trying to defend the existing major credit ratings agencies. I think even their most ardent supporters would admit they made significant mistakes and that the entire system needs work.
Dagong is a Chinese credit rating agency that rates a large number of Chinese bonds, a symbolic rating on the US government sovereign debt, and virtually ignored outside of China. Dagong is seeking to make a name for itself by pounding the table about the existing major credit ratings agencies and trying to reinvent credit rating.
I have a number of thoughts on the matter. First, I think there is a real need for increased competition in the credit rating agency world. The three major agencies S&P, Moody’s, and Fitch dominate the credit rating world due to the quasi-monopoly they have been granted by the US government in the United States. Given the importance of this work, this has carried over into a domination of the credit rating world in other ratings work and in other parts of the world. Unfortunately, this has led to low quality ratings, group think, and conflicts of interest which have been detailed else where. I think it is important to bring new entrants into this arena.
Second, the Dagong release on the “Guiding Principles of Credit Ratings” has got to be one of the most non-sensical things I have ever read. There are three points here I would like to highlight.
- It borrows major portions directly out of the communist party handbook on how to analyze the economy. It literally talks about “dialectical materialism” and credit ratings as if Marx and Engels were analyzing cash flows and repayment risk. The document is filled with communist and party sounding gibberish that means nothing to savy investors around the world.
- When it does directly address non-gibberish issues, it talks only about factors that are well known to credit analysts and economists the world over. The counter cyclical nature of credit and industry risk outside the specific firm of repayment. Memo to Dagong: you aren’t the first people in the history of mankind to discover the counter cyclical nature of credit expansion and contractions. In short, despite their claims to developing a new theory of credit rating, I see absolutely nothing new in their work.
- Most importantly, while Dagong talks about the importance of rigorous ratings as building trust it is completely divorced from this in reality. Just how divorced you ask? Dagong lowered its rating on US Federal Government sovereign debt to an A- in the fall last year. To put that in perspective, according to JP Morgan, there is only one bond in all of China with a lower rating. 99.9% of all bond issuances in China receive a AA or higher. Now let me emphasize, I do not approve of US fiscal policy and public finances. There are enormous problems. However, it strains all credibility to believe that the US government is a worse credit risk then all but one bond issuance in China. The point being: while making headlines on the US government rating cuts may make for good headlines, they do nothing for Dagong credibility.
I believe strongly in the need for additional credit ratings agencies. However, if Dagong wants it self to be taken seriously: stop sounding like the propaganda department in the Finance Ministry for Beijing, establish credibility with your ratings, take out the Marxism, and be willing to rate a Chinese firm as junk debt. Then, you will be taken seriously outside of China.