September 29, 2010 / 5:56 AM / 9 years ago

New China rating firm's model could reshape industry

BEIJING (Reuters) - China is setting up a semi-official credit rating firm that breaks with the mainstream Western pricing model by charging investors rather than issuers to assess creditworthiness.

Chinese officials have been scathing about foreign rating agencies, which they say had an interest during the global financial crisis to assign top-notch ratings to complex structured securities many of which turned out to be junk.

Domestic Chinese agencies are also culpable in the eyes of critics for being too close to the borrowers they rate.

The aim of China Credit Rating Co, which will operate as a not-for-profit entity, is to sidestep such conflicts of interest, perceived or real.

CCRC will have more credibility because it will sever the chain of self-interest linking the rating agencies and the issuers that pay them, Chairman Feng Guanghua said at a ceremony to mark the establishment of the company.

The agency is funded by the National Association of Financial Market Institutional Investors (NAFMII), a trade group that comes under the wing of the People’s Bank of China, the central bank.

NAFMII’s remit is to develop China’s bond market. Among other initiatives, it is trying to set up a Chinese-style market for credit default swaps.

Liu Shiyu, a central bank vice governor, emphasized the importance for ratings agencies of making independent risk assessments.

“The new firm is a tentative effort on this road,” Liu said at the ceremony. “But we also need to be aware that it will be a very difficult task to reform the ratings industry.”

Because CCRC is still setting up shop, company officials were unable to give details of its charging model.

China has three major ratings agencies — Dagong Global Credit Rating Co, China Chengxin international and China Lianhe Credit Rating Co — that have a combined market share of more than 95 percent, according to local media reports.

Dagong is the only wholly Chinese-owned firm of the trio. The other two are tie-ups with international partners, with Moody’s and Fitch Ratings holding 49 percent stakes in each respectively.

Foreign ratings firms are not allowed to directly rate Chinese domestic currency bonds.

Some industry experts said the introduction of a new charging model could have a big impact in China, triggering reforms to the way bonds are priced and to the governance of rating agencies.

“Of course it will force all other rating agencies to rethink their charging model and make changes accordingly,” Gao Zhanjun, an executive director in the fixed-income sales department of CITIC Securities, told Reuters.

Gao said the new model would not replace the old one overnight. “It will be a gradual process, but at least we’re moving in the right direction,” he said.

An analyst at a domestic investment bank was more cautious in the absence of details of the charging model; it was not even clear whether CCRC, as a trade association, would function as a rival to existing rating agencies.

“So many things are still not clear enough,” said the analyst, who asked not to be named.

Reporting by Aileen Wang and Alan Wheatley; Editing by Ken Wills

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