Dagong Global Credit Rating of China is upset that the SEC had turned down its application to become a Nationally Recognized Statistical Rating Organization (NRSRO).  Dagong urged the US government to provide a fair trade environment for Chinese financial organizations, but indicated that it may change tack and focus on providing corporate ratings in other international markets.  Guan Jianzhong, chairman of Dagong, commented in a recent interview:  “We are currently reconsidering our plan to expand in the overseas markets.”  

The SEC had rebuffed Dagong’s application, because it does not have local offices or provided ratings services to American companies.  Guan, however, refutes these claims. “How can we give rating services to US companies unless we have a presence in the market?”  He added: “The SEC decision is also part of the US efforts to maintain the dominance of American credit rating agencies in the global market. The US government must reciprocate the Chinese gesture of opening the domestic market to US credit rating agencies.”  

Harold “Terry” McGraw III, Chairman and CEO of McGraw-Hill Companies, which is the owner of S&P, suggested in an interview with the Financial Times that Dagong followed a “populist mood” and that Dagong lacks transparency by not publishing its policies, procedures, assumptions and criteria.

Mr. Guan countered by stating that this accusation was irresponsible to label a newly-established international rating agency as “populist”.  Instead S&P should practice self-criticism because of its own failings.  Concerning its own standards Dagong said it has been maintaining its independent, impartial and fair position, while the independence of U.S. rating firms should be questioned due to their close relationship with shareholders.  Meaning S&P being owned by McGraw-Hill Companies and Moody’s major shareholder being Warren Buffett.

Mr. Guan also defended Dagong’s openness and transparency in rating standards, although Dagong has never published them.  Mr. Guan seems to acknowledge such deficiency by stating “The English version of Dagong’s sovereign credit rating standards and methodologies will be released soon.”  Source: China Daily and Financial Times

BIIA Comment:  It is regrettable and unfortunate that a new member of the rating industry choses to resort to distorted rhetoric instead of engaging in a rational debate.  Based on Dagong’s comments one could get the impression that a) Dagong is being treated unfairly by being prevented from operating in the US and obtaining NRSRO certification. b) That the NRSRO regulations were created to protect American rating agencies from foreign competition and to maintain the dominance of US rating agencies in global markets.

As to point a) “When in Rome, do as Romans do”, therefore local laws will apply just as in China.  The regulations to become a NRSRO were established long before Dagong started its business.   Regulations have recently become much tougher with transparency being the core issue.   There are currently ten NRSROs operating in the US, all of which started to operate in the US before obtaining NRSRO certification.  Nothing prevents Dagong from opening an office in the USA to rate companies.

As to point b): The NRSRO regulations were not created to protect American rating agencies from foreign competition.  Mr. Guan seems to conveniently overlook the fact that four of the NRSROs operating in the US are foreign owned (Fitch, being French; Dominion Bond Rating being Canadian; Japan Credit Rating Agency, and Rating and Investment Information, Inc. , both being Japanese).   All followed the rules and complied with local regulations in becoming NRSROs.

Dagong could follow the example of Coface, a French credit insurer who is a new entrant to corporate ratings and who operates also in the US. Coface is applying for a European accreditation with the CESR (Committee of European Securities Regulators).  Since Dagong has international aspirations it should also seek accreditation with the CESR.  It would be interesting to see what the European regulators have to say about Dagong’s application.

BIIA Newsletter September I – 2010 Issue