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Home > Blogs > Ian Fraser > Dagong chairman calls for radical reform of global credit rating system

Dagong chairman calls for radical reform of global credit rating system

Quantitative easing | Dagong chairman calls for radical reform of global credit rating system Ian Fraser

Guan Jianzhong, chairman of Dagong Global Credit Rating Co has accused western democracies of using credit rating agencies to pull the wool over the eyes of their creditors such as China. In this piece in China Daily he also comes up with some constructive proposals for an alternative framework for rating credit, which he suggests would serve investors, and indeed humanity, better.

Jianzhong lays into the US-based credit rating agencies -- Standard & Poor's, Moody's and Fitch -- for basically being entirely biased towards the needs of the US and its closest allies. He said they have in recent times focused on enabling the world's largest debtor nation to “plunder its creditors”, and thus "betraying international investors”. He writes:

"The US has adopted what it calls a quantitative easing monetary policy, which reflects the decrease of its real national solvency, and the dramatic decline in the government's willingness to repay its debts. An international credit rating agency should respond to this, but the three American agencies chose to remain silent.

"In this way, they supported the US government in its plundering of creditors, by using its muscle to issue the international reserve currency. These agencies have betrayed international investors and their interests, proving yet again that they are the faithful servants of the biggest debtor nations."

In a memorable intervention last November, Dagong said QE was the equivalent of "drinking poison to quench thirst".

Apologies for the long quotes, but the picture of soaring debt and fiscal imprudence in the west that Jianzhong paints in his China Daily piece, published on June 27, is rather colorful. Jianzhong wrote:

"The 15 countries that account for 59% of global GDP -- the US, Canada, Iceland, Ireland, the UK, Germany, France, Italy, Spain, Austria, Belgium, Portugal, Greece, the Netherlands, and Japan -- are the economies that have suffered the most serious damage.

"When faced with the crisis, these countries all relaxed their monetary policy to nearly zero interest and employed other unprecedented stimulus policies. When the economic regulations were nearly exhausted, the expected economic recovery did not happen and the statistics of all of these 15 countries, in 2010, were far from optimistic. Their GDP was $42.3 trillion, a slight growth of 16.4% from 2006, while total government debt amounted to $40.2 trillion, up 45.1% from the same year.

"Meanwhile, the total amount of government debt accounted for 94.9% of GDP compared with 77% in 2006; and 262.2% of government revenues compared with the previous figure of 92.4%. Economic growth in these countries fell far short of debt growth, which continued to rise. Financing costs also tended to go up because of the increased risk in national debt repayments. The driving force behind economic growth was not clear in most developed economies, and this meant gloomy prospects."

Jianzhong said he is surprised Moody's and Standard & Poor's haven't done more to reflect these developments. By contrast, Jianzhong argues that more fiscally prudent and economically responsible emerging economies have been hard done by:

"The 15 major emerging countries and regions that account for 25% of global GDP -- Russia, China (including Taiwan and Hong Kong), South Korea, Thailand, Indonesia, Singapore, Malaysia, Iran, Saudi Arabia, Algeria, Brazil, and Argentina -- which also suffered greatly in the crisis, nonetheless have their strong wealth-producing abilities, as was demonstrated by their ability to withstand the crisis.

"By the end of January 2010, their total foreign exchange reserves amounted to $5.5 trillion, an increase of 89% from the end of 2006. The same year, total estimated GDP was $15.5 trillion, up 41% from 2006. These emerging debtor nations, in fact, maintained the stability of the international credit system by relying on their own strengths. They continued to provide funds and commodities to support the developed debtor nations that suffered heavily from the crisis. This in turn helped avoid a complete breakdown of the international debt system."

Jianzhong said it's time for a new international credit rating system that would enable the world to take the "right path to economic recovery and avoid repeating past mistakes." He outlined four principles which be believes should underline future reforms (edited slightly for clarity and brevity):

  1. Globalization - Credit globalization means local credit risks can quickly escalate into a global crisis. Each country's credit rating system needs to be an integral part of the global system.

  2. Independence - The international system should provide a clear warning of impending crises, and it has to be independent to achieve this. The system should represent the interests of every member of the international community and rating agencies should have protection of the public interest as their top priority. The international system should disclose risks based on objective research and not be swayed by ideology or vested interests. Credit rating should be a business chartered by government and recognized by the market, and not a tool of free-market competition.

  3. Consistency - To ensure the impartiality of ratings, there need to be certain measures, such as technical and professional codes, to standardize the behavior of rating agencies. There need to be international, unified standards to ensure the consistency of credit ratings.

  4. International regulation - There is a need for regulators for an international credit rating system and a unified set of rules. Individual nations' regulations have to be subordinate to international regulations.

Jianzhong said his proposed new framework, something the G20 called for at its Toronto summit in June 2010 but has failed to deliver, would have three components: an international credit rating regulatory organization; an international credit rating agency; and international credit rating standards. He said the international rating agency could be "composed of rating agencies for each country. It can be responsible for setting unified international standards, rating multinationals, and taking part in ratings in various countries to help them check for and prevent credit risks."

I'm sure this will all be dismissed as pie in the sky by supporters of the status quo but, as the world's leading creditor nation, China is certainly entitled to suggest an overhaul.

Further reading on China, the global economy and the trouble with credit rating agencies:

Tags: China , China Daily , credit rating agencies , developed markets , emerging markets , Fitch , G20 , GDP , globalization , Guan Jianzhong , international regulation , Moody's , QE2 , quantitative easing , Standard & Poor's , surplus nations , Toronto summit , US
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