Friday, August 13, 2010

China's new rating agency

Looking south from Top of the Rock, New York City

Image via Wikipedia

By Matthew McClearn

The term "AAA" is the highest accolade in the alphabet soup churned out by credit-rating agencies; issuers bearing it are theoretically capable of enduring depressions, and can borrow at the cheapest rates going. So, many noticed when the United States — the world's largest economic and military power — lost that coveted status in July.

The downgrade came not from the widely recognized American agencies (Standard & Poor's, Moody's Investors Service and Fitch Ratings, known colloquially as the Big Three) but rather from an obscure Beijing-based entity called Dagong Global Credit Rating. It wasn't, strictly speaking, even a downgrade, for this was Dagong's first stab at rating sovereign issuers. But its opinions of 50 nations were strikingly different than those offered by the Big Three: Dagong granted higher scores to developing nations like China, Russia and Brazil, while meting out lower ratings for certain developed economies including Britain, France and Canada. Notably, Dagong deemed China's creditworthiness superior to America's.

There's a disconnect between Dagong's ratings and its official pronouncements. "The U.S. is insolvent and faces bankruptcy as a pure debtor nation but the rating agencies still give it high rankings," Guan Jianzhong, its chairman and president, recently complained to the Financial Times. If Guan actually believes that, should Dagong not cut the U.S. to junk status?

Even so, many share Guan's skepticism. Seemingly oblivious to its mounting trillion-dollar deficits, the Big Three continue to rate the country AAA with a "stable" outlook. But they've been wrong before. Over the past decade, they failed to predict the implosions of Enron and Lehman Bros. They handed AAAs to dodgy mortgage-backed securities, thus contributing to America's housing bubble. And lately they've also been accused of being behind the curve on Europe's sovereign debt crisis.

China's new rating agency

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