We briefly reported in the October I – 2010 issue of the BIIA newsletter that 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. 

China Credit Rating Co. (CCRC) will operate as a not-for-profit entity.   CCRC 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.  NAFMII’s purpose is to develop China’s bond market. Among other initiatives, it is trying to set up a Chinese-style market for credit default swaps. 

CCRC’s Chairman Feng Guanghua stated in the opening ceremony that the CCRC will have more credibility because it will sever the chain of self-interest linking the rating agencies and the issuers that pay them.  Liu Shiyu, a vice governor, of the People’s Bank of China, emphasized the importance for ratings agencies of making independent risk assessments, but one has to be aware that it will be a very difficult task to reform the ratings industry. 

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.

This is a significant development signaling that the Chinese Government is going to exert more influence or control of the credit information sector comprising of credit ratings, commercial and consumer credit information.  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., is to sidestep such conflicts of interest, perceived or real.  General sentiments seem to follow the notion that the credit crunch was caused by erroneous credit ratings, which in fact is not entirely true.  Chinese officials also appear to be quite concerned that many of the leading credit rating agencies and credit information companies are foreign owned, giving rise to the perception that vital information is outside their control.   Source:  Reuters.com and general industry commentary

BIIA Newsletter October II – 2010 Issue