China's Long Term Plans And End of The USD and Treasuries

The following is from the FT:
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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 

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The following is the Xinhua News Agency report:

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Toward a fair ratings system

English.news.cn   2010-07-19 09:07:29

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By Deng Yuwen

BEIJING, July 19 (Xinhuanet) -- A recent report by Dagong Global Credit Rating Co Ltd on the world's sovereign credit status and its risks, is a significant step by a non-Western entity to break the long-established monopoly of Western ratings agencies over the global credit ratings business.

The report by China's first domestic ratings agency covered 50 countries whose gross domestic product (GDP) accounts for 90 percent of the world economy, and evaluated 27 countries differently from how Western rating agencies such as Moody's, Standard & Poor's (S&P) and Fitch have been doing.

In its report, Dagong gave some emerging and well-performing economies higher ratings than the three Western rating giants did. It also gave a comparatively lower rating to those slow-growing developed countries that have been bogged down in economic and debt troubles.

Due to its good economic performance in the context of the global financial crisis, China received a higher credit rating than the United States and some other Western countries, chiefly due to their worsening deficits.

China's local-currency rating was AA+ and foreign currency rating AAA, according to the Dagong report, both higher than those given by Moody's, S&P and Fitch. In its report, Dagong rated the US "AA" with a negative outlook both in its local as well as foreign currency.

In its report, Dagong mainly based its credit ratings criteria on different countries' comprehensive institutional strength and their fiscal conditions, with the former reflecting an economic entity's ability to guarantee wealth creation, an index that indicates its potential to create wealth and fiscal revenues in future, according to a manager of the agency's risks evaluation department.

Fiscal conditions reflect an economic entity's funding fluidity in future through comparing its revenues and debt status.

Dagong rated the 50 countries according to its own credit rating standards, which include the ability to govern a country, economic power, financial ability, fiscal status and foreign reserves, according to Guan Jianzhong, chairman of the non-governmental ratings agency.

Undoubtedly, China's current political and economic institutions ensure that it has far higher ability than the US in wealth creation and revenue collection. Beijing's fiscal conditions are also much better than Washington's, not just now but also likely in the years ahead.

A comparison between the two countries' GDP growth trends, foreign trade, international balance of payments, foreign reserves, their foreign debt and its structure, fiscal revenues and financial policies, all factors that influence a country's debt repayment ability, easily helped draw these conclusions.

Dagong's report is expected to help break the long-established monopoly of Moody's, S&P and Fitch over the global credit ratings market. For a long time, the credit ratings offered by the three have caused controversies across the world due to their lack of an independent, impartial, objective and scientific perspective.

Also, US values and standards have been mainly used to evaluate other countries' sovereign debt as well as those of their enterprises. This has not only resulted in their repeated failure to issue a necessary alert in a timely and accurate manner but has also contributed much to global financial turbulences.

There exists two super-hegemonies in the current world, with one being the US and the other Moody's, a US politician once put it. Compared with the US' conquest of the world by means of force, Moody's has controlled the world through its dominance in credit ratings.

Credit ratings agencies are a new hegemony in the post-Cold War period, a New York Times editorial once pointed out. That could explain why the European Union felt anger at Moody's, S&P and Fitch and announced that it would set up its own ratings agency after the three US-led agencies rated the Greek sovereign credit as junk, a rating that caused Greece's crisis to spread to the rest of the european continent.

China has also been a victim of the three ratings agencies. At a time when China launched accelerated efforts to list some domestic banks in overseas markets in 2003, S&P turned a blind eye to the country's fast and sustainable economic growth and announced that it would maintain its BBB-grade rating of the country's sovereign debt, the minimal level "suitable for investment".

It also gave 13 Chinese commercial banks a junk rating. S&P, together with Moody's and Fitch, even gave China's sovereign debt a lower credit rating than debt-plagued Spain.

To reform the West-dominated international financial order, more credit ratings agencies should be set up in non-Western countries to break Western monopoly over the global credit ratings business.

Dagong's recent report signals China's efforts to participate in making new rules for international ratings and to seek a larger say in this area. However, China still has a long way to go before it can increase its own influence in its credit ratings system given that the country still faces huge difficulties in expanding the authority of its fledgling credit ratings agency and letting its ratings report be accepted by the international community.

As its economic strength grows further, China's credit ratings agency is expected to win a proportionate international status. What the country should do now is to map out the development layout for its credit ratings system as soon as possible and make related laws and regulations in a bid to offer institutional support for the country's pursuit of a deserved voice in the international financial market and the power to make international financial rules.

The author is a senior editor with the Study Times.
Editor: Wang Guanqun
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