Sunday, November 20, 2011

The “Big Three” Credit Rating Agencies plus the Chinese Dagong Global – A new Asian and International Reality

by M. Ulric Killion


“Dagong Global Credit Rating Co. Ltd. (hereinafter referred to as "Dagong") is a specialized credit rating and risk analysis research institution founded in 1994 upon the joint approval of People‘s Bank of China and the former State Economic & Trade Commission,  People’s Republic of China, and is also a key credit information and credit solution service provider in China. As the most influential founder of China‘s credit rating industry and market, Dagong has all franchise qualifications granted by the Chinese Government,  and is an official institution providing credit rating services for all bond issuers in China.”; Photo / Dagong website.

In a recently written policy brief entitled, “What Can and Cannot Be Done about Rating Agencies”, Nicola Véron (2011), a visiting fellow at the Peterson Institute for International Economics, explored some of the modern problems of credit rating agencies (CRAs). He presented an excellent discussion of some of the critical problems surrounding these CRAs, especially the recent problems attendant to their often seemingly poor timing of downgrades (i.e., downgrading countries such as Greece and China).

A failing, if any, of his policy brief, or approach to examining the problems of CRAs is that he emphasized these issues in the context of the “Big Three” CRAs, which are Standard & Poor’s (S&P), Moody’s Corporations, and Fitch ratings.  

In other words, his study or policy brief, though an excellent presentation, would have been more interesting with an inclusion of the issues and controversy surrounding China’s national currency—renminbi (RMB, international code id CNY, Chinese Yuan). This is because China and other countries are seeking to internationalize China’s national currency.

Véron admittedly did mention other CRAs; such as AM Best (US-based), Eagon Jones (US-based), Kroll Bond Rating Agency (US-based), Dominion Bond Rating Service (Canada-based), Japan Credit Rating Agency (Japan-based), and Rating & Investment Information (Japan-based), including the Chinese rating agency Dagong Global Credit Rating Co. (“Dagong Global”), which is the focus of this short writing.

However, Véron paid scant attention to the potential implications of the launch of Dagong Global. The only other mention of Dagong Global is in a footnote, which distinguishes Dagong Global from the other CRAs. This is because, unlike the other CRAs, it is not registered with the U.S. Securities and Exchange Commission (SEC).

Véron (2011) notes that,

Of this list, all except Dagong are registered with the US Securities and Exchange Commission (SEC), which designates them as Nationally Recognized Statistical Rating Organizations (NRSROs). A 2009 application for registration by Dagong was not accepted by the SEC (SEC 2011a, p.4). National units of AM Best, Dominion Bond Rating Service, Fitch, Japan Credit Rating Agency, Moody’s, and S&P are also registered in Europe and supervised by the European Securities and Markets Authority (ESMA).


“The European Commission has today released proposals to regulate Credit Ratings Agencies (CRAs). PES Press release 15/11/2011.” The Party of European Socialists (PES) have called the proposals ‘diluted’, with the main issue of establishing a European independent credit rating agency to oversee the agencies entirely absent from the final text. “Unchecked power and money is the big problem with Credit Rating Agencies”, said PES President Poul Nyrup Rasmussen. “Unfortunately, unchecked power and money is also a big part of EU lobbying, and it would seem that Ratings Agencies have been lobbying very hard to pre-emptively reduce the impact of the Commission’s proposals”; Photo, Worrying signs that Commission is already cowed by Credit Ratings’ Lobby as Barnier tables proposals | Europeans For Financial Reform, November 15, 2011.

Véron failed to mention, however, that the rejection by the US-SEC of the application of Dagong Global associates with allegations of bias. For this reason, both Dangong Global and the SEC issued press statements after the rejection of Dagong Global’s application for registration as a Nationally Recognized Statistical Rating Organization (NRSRO).

On September 25, 2010, Dagong Global issued a press statement “saying that its application for NRSRO status in the United States is rational and complies with rules and laws, and the contention by U.S. authorities that they are unable to handle cross-border oversight and regulation amounts to bias against Chinese credit-rating agencies. Dagong will not accept the NRSRO status at the price of betraying national sovereignty, according to the statement” (People’s Daily, 2010).

In reply, the SEC issued a statement on its official website; citing that the objection to Dagong Global’s application for registration as a NRSRO is because it cannot perform cross-border oversight and regulation of Dagong Global (People’s Daily, 2010).

On the issue of the cross-border oversight objection and/or problem, Dagong Global’s press statement also stated,

Dagong said that its application for the NRSRO status in the United States has completely been a type of market conduct. “We will absolutely not accept the one and only reason put forth by the SEC – that it cannot perform cross-border oversight and regulation.”

NRSRO refers to the qualification reviewed and approved by the SEC to allow a credit rating agency to conduct business in the United States.

Dagong said that the SEC has unreasonably denied the application of a Chinese credit rating agency that met application standards. It is not only against the rules of the American “Securities Exchange Act,” the “Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations,” and related international rules and laws but also resulted in a huge loss for Dagong.

“Dagong will consider conducting activities at the right time to protect its rights, including seeking legal actions against the SEC,” the statement read.

The statement went on to point out that as the largest creditor country of the United States, China owns a huge amount of financial assets in the United States, so having China’s own say in credit rating in the United States is significant to safeguarding the security of China’s overseas financial assets.

“The SEC’s deliberate denial is evidently aimed at preventing Dagong from gaining influence in the international credit rating market, and at maintaining the monopoly of three U.S.-based major credit rating agencies,” the statement read (People’s Daily, 2010).

A problem of the allegation of bias against China is that, in the context of a global economy, China’s national currency and its trade, finance, and monetary mechanisms enjoy dire relevancy.

According to the economist Jing Li (Capital University of Economics and Business, China), the internationalization of the RMB is inevitable. This arguable inevitability may well be mostly attributable to the reality, as described by Jing (2006), that, “The integration of Asia, and the growth of RMB as a regional key currency will challenge the current imbalanced international monetary system. This will improve the global currency structure, reduce the overdependence on USD, and promote the resource allocation efficiency in developing countries.”


People’s Bank of China Governor Zhou Xiaochuan answers a question during a press conference in March 2010. The International Monetary Fund on Friday said it will hold a high-level conference of central bank governors in Shanghai next week to discuss ways to address the global financial crisis; Photo / AFP / Liu Jun.

It should be noted that as early as 2009 there were aggressive rumblings from China and other countries, including in the United States; when many were advocating replacement of the US dollar with a new global currency. It was earlier observed that, “China Central Bank Governor Zhou Xiaochuan’s earlier call to replace the US dollar with a new global currency seems to be slowly gaining support in the international community” (Killion, 2009).

For example, some of the earlier growing support for replacement of the U.S. currency included Joseph Stiglitz, a Columbia University economics professor, and Marc Chandler, who is a currency strategist at Brown Brothers Harriman.

Additionally, although both the Federal Reserve Board Chairman Ben Bernanke and U.S. Treasury Secretary Timothy F. Geithner earlier rejected on March 31, 2009 the call to drop the dollar as the world’s key reserve currency” (Killion, 2009; Lesova, 2009), according to some news sources, Geithner earlier expressed some openness about a new reserve system based on the IMF’s special drawing rights (SDRs), though admittedly not specifically mentioning China’s national currency, the RMB.

Moreover, the failings of the “Big Three” for obvious reasons directly influence the receptivity of the RMB in the international monetary system, while also presenting a challenge to its receptivity.

Dai Daohua (Senior Economist at the Bank of China) earlier set forth both the major shortfalls of the “Big Three” and some of the choices available to China. In light of these shortfalls, according to Dai (2010), China faces two choices; China can either strengthen its own credit rating system or push for international credit rating reform.

For this reason, the success or failure of Dagong Global may have far-reaching implications, notwithstanding its potential to lure more Chinese investors (See, Cf., Tian, 2011; discussing Dagong Global’s first sovereign customer, which was the Republic of Belarus, and the potential lure of Chinese investors).

In other words, the growing role of China’s national currency in the international monetary system warrants serious consideration of the new Chinese CRA, the Dagong Global. This is because the launch of the China-sanctioned new Chinese CRA actually associates with growing responses to the failings of the “Big Three” CRAs, including, as Véron (2011) even recognized, the unreliability of the “Big Three.”

All of this speaks to the severity of the failings of the “Big Three” and China’s perception of the “Big Three,” while also prospectively serving to demonstrate that in future discussions about CRAs the potentiality of Chinese CRAs is due serious consideration.


Nicola Véron, What Can and Cannot Be Done about Rating Agencies, Peterson Institute for International Economics, Policy Brief – PB11-21, November 2011; A synopsis of his article reads:

The constantly developing global financial system needs better risk assessments than Credit Rating Agencies (CRAs) have been collectively able to deliver during recent crises. More comprehensive public disclosure by issuers on their financial risks, which would not require intermediation by CRAs, is the best chance for new and better risk assessment methodologies and practices to emerge. To put it in a simplistic but concise way, what is needed is “a John Moody for the 21st century.” CRAs themselves can perhaps be somewhat improved by adequate regulation and supervision, but public policy initiatives that focus only on CRAs are unlikely to adequately address the need for substantially better financial risk assessments. If real progress is to be made towards a better public understanding of financial risks, it will have to involve innovative approaches that even well-regulated CRAs, on the basis of recent experience, may not be the best placed to deliver.

M. Ulric Killion, Growing support for China bank official’s call for new global currency, M. Ulric Killion's space, April 1, 2009; Alternatively, see M. Ulric Killion: Growing support for China Bank Gov. Zhou's call for new "Global Currency," April 1, 2009.

Chinese credit-rating agency denied entry by US authorities, claims bias, People’s Daily Online, Sept 26, 2010.

Jing Li, RMB as a Regional International Currency: Cost-benefit Analysis and Roadmap, Centre for European Studies, Fudan University, May 12, 2006.

Polya Lesova, Geithner, Bernanke reject China currency proposal, MarketWatch, March 24, 2009.

Dai Daohua, Credit Rating Agencies’ Reform and China’s Choices, Hong Kong Trader, Jun 30, 2010.

Wei Tian, Dagong gets first nation client, China Daily, November 9, 2011.

Copyright © Protected - All Rights Reserved M. Ulric Killion, 2011.

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