Sun Kai's  Instablog

In a previous post I examined China's Dagong Global Credit Rating Co. and hazarded the opinion that the Big Three monopoly on global credit ratings (corporate or otherwise) may soon be coming to an end.  One reader sent me some further information which I'd like to share regarding new financial rules in the US.  At the same time, I'd also like to discuss some thoughts on the independence of this company that I didn't have space to examine earlier.

Rule 17g-5

First,  let's talk about Rule 17g-5.  

As reported in FT's Alphaville last week:

Rule 17g-5, briefly discussed on FT Alphaville on Wednesday, is an amended SEC reg that came into effect last month. In a structured-finance nutshell, it requires ABS and MBS arrangers to make the information they provide to hired ratings agencies also available to unhired agencies, for potential use in making ‘unsolicited’ ratings. It’s all in part of an effort to facilitate transparency and unbiased ratings.
 

This new rule is a huge boon to independent agencies such as Dagong.  The only catch is that Rule 17g-5 requires the company to be a National Recognized Statistical Rating Organization which Dagong is, so far, not.  Whether or not they will achieve such recognition all depends on the SEC decision due in September. (Thanks to KFC for the link).

An Independent Third Party?

But let's return to the idea of Dagong as an independent company.  Much of the dismissal of Dagong's potential in Western media is, besides longstanding biases, predicated on the idea that since it is a Chinese company, operating in a political sensitive environment, then it must have links to the government.  Is this a fair criticism?

I think the answer here is an affirmative given a few factors which I raised in my last post.

First I said:

The opening 2/3rds of the article itself are given over to a discussion of the importance ratings agencies play within the global economy, their power to wreck a nation's economy via a downgrade, and why DaGong has become the only one of China's 5 credit rating agencies to evaluate sovereign debt (unlike the other four agencies, DaGong has no foreign ownership).

 

Why is this important? According to the article, Big Three ownership of Chinese Credit Rating Companies breaks down as follows 

Company	Foreign Owner	Stake
中诚信 CCXI	Moody's	49% Equity (51% after 7 years)
上海远东 - Shanghai Far Eastern Credit	"American Controlled HK Xinhua Finance*"	62% Equity Stake
联合资信 Lian He Ratings	Moody's	49% Equity Stake
上海新世纪评级 Shanghai New World Rating	S&P	In Acquisition Talks
大公国际 - Dagong	None	None

* NB: I can find no substantiation for this claim of control. 


Also from my previous post

At a conference on China Credit Ratings put on by Xinhua and other organizations, the inspector of the Central Finance Committee Leading Goup and Moderator of the “Credit Rating and Government Financial Safety” panel, Wu Hong said that at present China must [proactively] establish a credit ratings system and seize the opportunity to have a voice in the capital markets.

From these two extracts (from two different articles) two things become clear. On one hand, developing a "voice in the capital markets" is now a focus of the Chinese government.  And the company which has so far made their voice heard just happens to be the only company in China without any hint of foreign ownership.

Of course the CEO of Dagong denies that there is any government push.  When asked if he had the support the Chinese government he said no because "he did not know what branch of government to seek assistance from".  

Personally, I would start here.  

But his denial goes farther than that. I had left a paragraph out of previous post because I was unsure of my translation.  That paragraph reads as follows: 

对记者提出的是否可以考虑“以股权换支持”的问题，关建中一口予以否定。他指出，虽然公司股权多元化是必然趋势，但其选择引入新战略投资者的原则是不能影响机构的独立性和公正性，不考虑引入国有股东，也尚未考虑引入外资入股

When the reporters brought up the question of whether [Dagong] had considered a "exchange of equity for support", Guan Jianzhong gave a flat denial.  Although corporate equity diversification is an inevitable trend, the idea of luring in new strategic investors must not influence the organizations independence and  fairness.  He had not considered soliciting sovereign investors nor had he considered attracting foreign investors.
 

I failed to include this in my first draft because i was unsure of the "以股权换支持" line.  Upon reflection it seems to me that the reporter is suggesting that Dagong sell an equity stake to an American (or other western) entity to curry favor with the SEC prior to their decision. Dagong is hesitant to lose any stake because of concerns of independence (even though this concern includes Chinese government purchases as well).  If any reader reads this differently then please let me know.

To bring all this to a head, it seems disingenuous to me to attempt to argue that your credit rating agency is independent from the government when

A.) It is an announced goal of government officials to "have a voice in global credit markets"
B.) This desire is predicated in some part because of concerns over soverign credit ratings
C.) Dagong Credit agency is the only Chinese credit rating agency without any type of foreign ownership
D.) It just also happens to be the only agency in China publishing sovereign debt ratings.
and
E.) It is firmly opposed to losing any of its independence to outside investors.

Now I don't argue that it may have no government ownership. I don't disagree that it genuinely wishes to be an independent globally recognized credit agency. However, to say that all of this is happening without some tacit or overt approval of the government is just a little hard for me to believe.  Of course Dagong will make the claim that they will brook no outside interference, but what company or industry can you point to in China that doesn't require a certain amount of government finesse.

Finally, I take none of this to criticize Dagong.  I believe competition in credit ratings agencies, particularly in light of recent history, is a good and necessary thing.   Nor do I dismiss the idea that our own Big Three have never had a closed door meeting with government officials.  I am simply saying that if you are Dagong then you can only expect that the Western media will be suspicious of your claims to independence. The burden to prove otherwise will require more than saying you didn't know which department to go to. This is particularly so when every other sign points to the idea that the Chinese government has a vested interest in your success.  At the end of the day its a matter of PR and a balance of strident claims vs. transparency.

As they say, 視其所以，觀其所由，察其所安。人焉叟哉？人焉叟哉?