New Chinese credit rating agency

The new agency aims to provide more balance to the current credit rating system, which at the moment is dominated by the "big three" of Standard & Poor's (S&P), Moody’s and Fitch, US companies that control 96 per cent of the market. Universal will provide an alternative viewpoint on ratings of countries and companies in international markets and, most importantly, it will be focused on Asia.

Although there are differences in the methodologies of credit rating agencies, the differences are greater between Dagong and the big three. Whereas the American agencies include factors such as the World Bank Governance Index, the Corruption Index, Ease of Doing Business Index and Human Development Index in their ratings, Dagong doesn’t. Moreover Dagong includes social wealth and gives different weightings to various factors – for example Dagong downgraded US sovereign debt in response to the Federal Reserve’s qualitative easing policies, which it says are devaluing the US dollar.

Although it is too soon to see how Universal will work, it is likely to be similar to Dagong, which has ratings that are often markedly different to the big three – for example China, Norway and Denmark receive a triple-A-stable rating from Dagong, whereas the US receives only a single A-negative rating. 

For China, the creation of a larger ratings agency close to home is important as it will provide a valuable source of information on investment. One of the first steps of the new agency, which will be based in Hong Kong, will be to assess the debt issued by Chinese companies in Hong Kong, building on the experience of Dagong, which has already rated over 9000 corporations and banks in mainland China.

The new agency should also help facilitate trade across Asia by providing a wider diversity of ratings in the region – for example providing information about Russian companies to Chinese and Southeast Asian bankers. Although it will take time for the new agency to gain widespread acceptance from mainstream investors, it should not take long for it to attract interest.

Dagong leapt into international prominence when it downgraded US sovereign debt and is now increasingly followed as an alternative source of information. Markets will therefore be closely watching Universal – especially considering China’s aspirations to establish the yuan as a reserve currency, as this Asian-based agency provides its own view on the strengths and weaknesses of currencies and sovereign states.

Earlier this year European countries also considered establishing an alternative to the American agencies as parliamentarians in Europe were concerned that the American agencies had huge power but little transparency. The attempt to establish a European-based agency failed – so there will be much interest in the progress of the new Universal Credit Rating Group.

 

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