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POLITICAL ECONOMY
Dagong chief says credit ratings need 'Chinese wisdom'
by Staff Writers
Beijing (AFP) March 26, 2014


The man behind Beijing-based credit ratings agency Dagong says "Chinese wisdom" will help it take on mighty Western names that failed by not predicting the global financial crisis.

"I think if you look at the entire picture of the international credit ratings sector, a lot of credit rating agencies have been influenced by the way of thinking of the Western ratings agencies," said the firm's chairman Guan Jianzhong.

"So this is something that we need to change," he told AFP after making a presentation to Chinese and foreign media outlining the firm's "Guiding Principles of Credit Rating", in which he said Dagong wants to offer the world "Chinese wisdom" on ratings.

However, while Guan is quick to promote his agency's superiority, he has had to bat away accusations it is anti-Western while pandering to Beijing and overlooking serious problems in China's economy.

Dagong -- founded 20 years ago -- remains far less prominent than its long-established Western competitors, though it has begun making a splash in international media.

It hit the headlines in August 2011 when it cut its main rating for US sovereign debt from A+ to A, with a negative outlook, after a standoff over Washington's debt ceiling that led to fears of a potentially globally destabilising US default.

Standard & Poor's of the US also slapped Washington with a credit downgrade that month, reducing it one notch to AA+ and denying it a coveted AAA rating for the first time.

Dagong -- which can be translated as akin to "great fairness" -- struck again in October, whittling the US sovereign credit rating to A- after another debt deadlock saw a two-week government shutdown.

Dagong's downgrades have come under suspicion as reflecting official concerns of China's government, the largest foreign holder of US Treasury debt that makes up part of the world's biggest foreign exchange reserves.

But it has sought to take advantage of global anger with the so-called big three agencies -- S&P, Moody's and Fitch -- which were widely criticised for having given their highest ratings to the debt instruments whose failure helped spark the global financial crisis in 2008.

Guan presses the theme. "The Western rating system is a failure," he said in his presentation. "If we follow this Western way" on credit ratings "we will end up nowhere".

Western agencies only focused on the possibility of default, he said. "The core theory of the Western ratings system is wrong. It cannot explain reality. In its methodology it's chaos.

"For our principle we take the probability of wealth creation as the basis for credit ratings. We take into consideration the maximum debt of a debtor and we also consider the outstanding debts of the debtor."

- Extension of the government? -

Nonetheless the reliability of Chinese economic statistics and the true situation of private and state-owned enterprises have been a source of concern for analysts for years.

Investors have questioned Chinese auditing standards, and scandals have erupted over the accounts of some foreign-listed Chinese companies.

Dagong also has to fight suspicions that it has a political agenda.

It has maintained China's foreign currency rating at AAA -- its highest grade -- and local currency at AA+, with a stable outlook, even as a debt audit by Beijing found local government liabilities had ballooned to almost $3 trillion by last June.

Guan acknowledges that he has been a member of China's ruling Communist Party since the age of 18, but said he has no links with the country's top officials.

"I can tell you for sure and with responsibility that personally I have no connection with the government and even the senior leadership of the Chinese Communist Party," he told AFP.

But his "Guiding Principles of Credit Rating" were put out in a booklet by the publishing company of the People's Daily newspaper, the party mouthpiece, using the red print and typeface typical of official publications.

Guan added that Dagong was "wholly private-owned" and that its goal of becoming a globally influential ratings agency means that it must be independent, impartial and objective.

"This is very important for a credit rating agency to earn its credibility," he said.

Christopher Balding, who teaches economics at Peking University's HSBC Business School in Shenzhen, describes Dagong's ratings methodology as being on "very safe ground", although the occasional use of terminology such as "dialectical materialism" can appear "off the rails".

The real perception challenge, he said, was if Dagong was seen as too aggressively anti-Western and anti-Washington, despite the very real problems it and others have pointed out regarding the state of US government finances.

"If they continue to play up this anti-Western, anti-US, pounding this into the ground, they're going to essentially, from a marketing standpoint, be aligning themselves much closer at being seen as an extension of the government, whether they want to or not," Balding said.

But Guan suggested that China's economic rise and growing influence meant it should have a commensurate voice in ratings.

"China is a big country sending out lots of capital," he said.

"We should depend on our own credit rating institutions that are capable to do the work. We cannot simply think that Western credit rating institutions are always the best."

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