July 14, 2011 / 10:44 AM / 8 years ago

Chinese ratings agency takes on the United States (again)

BEIJING (Reuters) - Negative views about U.S. creditworthiness may be common these days, but for sheer bearishness it is hard to beat Guan Jianzhong, the chairman of China’s Dagong Global Credit Rating.

In July, Guan’s little-known ratings agency slapped an AA rating on the United States, lower than the AA plus rating it gave China and far lower than the top rating bestowed by the three international credit ratings agencies.

It downgraded U.S. debt in November, after the Federal Reserve launched a second round of quantitative easing. And shortly after Moody’s warned on Wednesday that the United States could lose its pristine rating, Beijing-based Dagong warned it might knock the United States down another peg.

“In the coming three to six months, if there is no major event to make real improvement in the fiscal situation in the United States, we will definitely downgrade the U.S. sovereign rating,” Guan told Reuters in an interview on Thursday.

Dagong is not a force in global markets by any stretch — its July downgrade of the United States prompted more amusement than market calamity.

But with its colorful pronouncements, the Beijing-based company is one sign of what analysts say is a rising desire in China for a greater say over the workings of global financial markets.

China is America’s biggest foreign creditor. Economists estimate that it has parked 70 percent of its $3.2 trillion foreign exchange reserves in U.S. treasuries. The ratings on that mountain of debt are determined by the three U.S.-based credit ratings agencies, a sore point among some Chinese commentators.

Sitting in his spacious office under a giant work of Chinese calligraphy that reads “Credibility for the World,” Guan warned that the United States could soon enjoy a sovereign rating on par with other in-debt countries like Spain if the Federal Reserve decides to pump more cash into the U.S. economy or the U.S. Congress fails to decide the new debt ceiling.

“If they decide to implement a QE III, we will not hesitate to downgrade its sovereign rating,” Guan said.

Beijing worries the program could weaken the dollar and devalue China’s holdings.

Dagong said in a statement on Thursday that sluggish economic growth in the United States and the lack of fiscal austerity measures will continue to worsen the U.S. fiscal situation, making it increasingly risky to hold U.S. bonds.

BATTLING THE BIG THREE, OR QUIXOTE?

Dagong has been rating Chinese corporate bonds since 1994, but it is a relative newcomer to sovereign debt ratings, issuing its first global sovereign report only in July.

The company, which has around 400 staff, including 30 sovereign debt analysts, is not yet taken seriously by global investors.

“International investors do not look at Dagong’s research with any weight,” said one Hong Kong-based fixed income fund manager, who added that the big three ratings agencies — Moody’s, Standard & Poor’s and Fitch — still have the most clout.

“Many funds have it in their mandates that they cannot buy anything that is not investment grade, and those decisions are still dictated by the big three agencies.”

Guan takes issue with that system.

“The international rating system, which is dominated by the top three agencies, is not reasonable,” Guan said.

“We want to get our own voice heard by the world, and we are on the right path.”

Dagong is the only one of China’s four main rating agencies that lacks a foreign partner.

China Chengxin International Credit Rating has Moody’s as a major investor, the China Lianhe credit Rating has Fitch as a key shareholder. The Shanghai Brilliance Credit Rating is in partnership with Standard and Poor’s.

Guan, who worked for the China National Aero-Technology Import & Export Corp before becoming chairman of Dagong in 1998, said his agency’s sovereign ratings have received interest from some market players, but he did not name any.

Although Dagong grabs headlines with its sovereign rating announcements, all of its revenues are generated at home by rating bonds issued by domestic enterprises.

The company, which provided ratings for about a third of bonds issued by local government financial vehicles, has found little default risk in the debt, Guan said, citing China’s rapid fiscal revenue growth.

“China’s local government debt is not a problem, and there are no default risks, and I can say that in a responsible manner,” he said.

Indeed, Dagong has gone so far as to give several local government vehicles higher ratings than the U.S. ratings.

Beijing has said that Chinese local governments had accumulated 10.7 trillion yuan in debt by the end of 2010, and many economists are worried that slower growth in the world’s second-biggest economy could set off a wave of loan defaults and hobble its banking system.

But Guan played down such risks.

“If the whole Yunnan government falls into difficulty, the central government will not sit still,” he said.

He said many local government officials had knocked at his doors asking for high ratings for their bonds.

“If they are not good, I have to turn them away,” he said.

A bond trader with a state-owned bank in Beijing, who declined to be named, told Reuters that ratings provided domestic agencies are important references for them in making investment decisions.

“But there’s a common problem that they gave ratings higher than necessary to bond issuers, so we can’t solely rely on them,” the trader, who is not authorized to speak with the media, said.

Additional reporting by Umesh Desai in HONG KONG and Steven Bian in SHANGHAI Editing by Brian Rhoads

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