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Guan Jianzhong, the head of one of China's three big credit rating agencies, sees the criticism of Standard & Poor's (MHP), Fitch Ratings, and Moody's Investors Service (MCO) for their role in the global financial crisis as creating an opportunity. He wants his firm, Dagong Global Credit Rating, to enter the U.S. market. "Without a challenge to the status quo, the big ratings agencies won't improve their methodologies on their own," says Guan, who is Dagong's chairman.
Dagong, which has never rated a company outside China, made a splash with its first analysis of international sovereign debt, which it issued on July 11. The report, covering 50 nations, awarded the Chinese government a higher credit rating, at AA+, than the U.S., the U.K., and Japan. Guan says the results highlight the differences between Dagong's approach and that of its rivals. The established agencies, he says, tilt their ratings to reflect "their beliefs and ideology" and the "interests of the borrowing countries" in the West. They place too much emphasis on the nature of a country's political system, the independence of the central bank, and per capita gross domestic product.
Dagong, in contrast, focuses on a country's fiscal health, foreign currency reserves, and ability to create wealth. The big developed countries like the U.S., Britain, and Japan, says Guan, use "over 90 percent of the world's credit resources, but their GDP growth doesn't contribute a lot to the world economy, especially after the financial crisis."
A graduate of Shanxi University of Finance & Economics, Guan worked in finance in New York for several years before returning to China. He became Dagong's chairman in 1998. Last month he was elected director of the government-backed industry group, the China Securities Credit Rating Committee.
Dagong was founded in 1994, a decade after state-owned firms were allowed to issue bonds in China. In December 2009 it spent 10 million yuan ($1.48 million) to prepare and submit an application with the U.S. Securities & Exchange Commission to become a recognized ratings firm. The SEC will hold a hearing on the application in September. The SEC has granted recognition to 10 ratings firms, with only two based outside of North America, both in Japan.
"They certainly picked a good time—global confidence in the existing ratings agencies is probably at an all-time low," says Tom Orlik, China economist at Stone & McCarthy Research Associates in Beijing. Yet it's not clear that Dagong has developed the credibility to compete globally. "Whether they'll be able to successfully push that outside of China, where's there's deep suspicion about the cozy relationship between government and companies, is difficult to foresee," says Orlik.
Like S&P, Moody's, and Fitch, Dagong is paid by the companies it rates. Guan says issuers, especially politically connected companies, also shop around among mainland agencies for the best rating. Gaun says his firm does not allow government connections to influence its ratings. "We want to be an internationally renowned credit-rating agency," he says. "Because of this, we can't provide ratings that aren't independent."
During a time of market anxiety over big budget deficits in the U.S. and Europe, Dagong could become a powerful player given China's trade surpluses and enormous foreign exchange holdings. "It's to their benefit that they're adding the voice of the world's largest global creditor," says William Hess, managing director at China Analytics, an economic research firm in Beijing. "If and when [Chinese investors'] funds start to follow the ratings coming out of China, then that's something that would really make markets sit up and notice."
It takes time to establish that kind of presence. Dagong should focus on China to "build up their reputation and influence," says Wang Yang, co-head of fixed-income research at UBS Securities (UBS) in Beijing. "At this point, I don't think they are ready to expand globally."
The bottom line: With Western credit ratings firms under fire, China's Dagong sees an opening to expand in the U.S. and other foreign markets.