US

US credit rating dropped - twice in three months

By Eric Jou (China Daily)
Updated: 2010-12-01 11:27

BEIJING - A small but outspoken Chinese company has defied the world's top ratings company by lowering the credit rating of the United States twice in just three months.

Dagong Global Credit Rating, founded by former public finance official Guan Jianzhong, in early November rated the US at A+ with a negative outlook.

In July, Dagong lowered the US to an AA rating from the highest AAA rating.

"The truth is when we were rating America, we noticed a change," said Guan, CEO of Dagong. "After the financial crisis, the domestic economic problems in the US became apparent.

"The US' growth is reliant on the market for pushing innovation and this is separate from government control. This separation is detrimental and is without government control. When a crisis happens there is no real resolution."

Guan said the problem arises when a country doesn't have much money and is a debtor so it can only borrow more money or print more money.

"The environment has changed. The economy of the US is now global, so if the government prints more money, the US currency will be devalued and lower the return of investment," he said.

Prompted by the US Federal Reserve's second round of quantitative easing, Dagong, founded in 1994 when Guan received a government loan, not only lowered the credit rating of the US but also denounced the big three of credit ratings companies, Standard and Poor's (S&P), Moody's and Fitch, saying they show favoritism to the US and artificially hold up the rating.

S&P, Moody's and Fitch, which are among the credit ratings agencies to have the stamp of approval of the US Securities and Exchange Commission (SEC) as certified bond raters, have been linked to the subprime mortgage crisis in the US that led to the global financial crisis.

Due to the mistakes of the big three with their handling of the crisis, some economists support the idea of a replacement system.

Wang Haifeng, a division chief of the Institute of Economic Research of the National Development and Reform Commission, said change needs to happen but not at the moment.

"The trio, due to the nature of their companies, have unique interests, thus making them less than objective," said Wang.

"However, given the relatively mature nature of the US and European credit management system, the big three are still needed until an independent agency can reach a similar level of maturity."

Only S&P would comment on Dagong's ratings.

Kim Eng Tan, director of sovereign & international public finance ratings at S&P, said all countries have different agencies.

"Japan, South Korea, Malaysia have their own ratings.

"Domestic credit rating companies carrying out sovereign ratings are hardly surprising," said Kim.

"Ultimately sovereign rating is just a judge. This judge can have a lot of different models, with different analysis tools.

"Even Moody's and Fitch's practices differ from ours. We can only acknowledge that it (Dagong's) is not the same assessment."

Dagong continues to seek recognition as a statistical ratings organization, or NRSRO, from the SEC. It has been rejected twice - in September and in 2007. The NRSRO title would have allowed Dagong's statistics to be used as benchmarks for US financial policies.

Guan cited the rejection as unfair business practices and US protectionism. S&P, Moody's and Fitch all have NRSRO titles.

The SEC has approved 10 other ratings companies, including companies from Canada and France.

The highly controversial rating and patriotic rhetoric has given the little-known Chinese ratings company a surge of infamy.

While Dagong drew praise for its call for a replacement ratings system, it has been criticized for the lack of transparency when explaining how it came up with its ratings.

"We explain why we gave the ratings," said Guan. "However giving our methods and procedures is giving away a trade secret; it's how we make our money."

Guan is hoping to redefine the global credit ratings game, believing there is a need for immediate changes in the way the credit system works. Also, investments should favor countries with large reserves of currency such as China over debtor nations such as the US and Ireland.

"If you look at developed countries like Ireland and the US," said Guan, "they have a level of social welfare that they shouldn't be enjoying."

With his nationalistic and patriotic leanings, there have been criticisms over the reliability and objectivity of Dagong, especially in relation to its relationship with the Chinese government.

"There is a lot of speculation in the media over this, but in reality we have nothing to do with the government. There is no ownership, no start-up capital; nothing comes from the government," Guan said.

"In fact we're probably cleaner and more separate from government than the big three.

"We want Dagong's reports to be a new standard. In this post-financial crisis era, we have come to see that the big three are unreliable, and that the world is ready for a post-American standard."

Wang and some economists trend to agree, but Wang said it's still too soon for a Chinese independent credit rating agency as the credit environment is unstable. To establish an independent agency requires a lot of data collection and processing, which are very expensive.

Zhang Lei contributed to this story.

China Daily