2010-07-21 14:09

If China shows consistent ability in standards setting, it will be able to climb the global monetary ladder

A recent report by Dagong Global Credit Rating Co Ltd on the sovereign debt status of some 50 countries marks an important first step by a ratings agency from a developing country to come up with a global credit ratings review independent of Moody's, Standard & Poor's (S&P) and Fitch, the world's three ratings giants.

Like the country's efforts to internationalize its currency, this move symbolizes another major step by China toward increasing its influence in the global financial market and acquiring global financial dominance.

Ever since the global financial crisis, quite a few financial derivatives rated highly by the three US-led ratings agencies have turned worthless. Due to their firm and long-held belief in the authority of the three ratings agencies, a number of Chinese overseas investors chose to buy these "top-notch" financial products in past years. As a result, their hard-won overseas investments either turned worthless or depreciated considerably in value during the global financial crisis.

Some asset investments, although remaining unchanged in value, also failed to become liquid enough to play its due role in boosting China's economic development.

Therefore, an independent credit ratings agency should be primarily aimed at breaking the established monopoly of US ratings agencies over the global credit ratings business.

An unchallenged monopoly will increase the possibility of US ratings agencies intentionally underestimating or ignoring the potential risks of American financial institutions in order to expand their market shares, even at the cost of hurting the interests of foreign investors.

Due to past practices, Moody's, S&P and Fitch have lost credibility in the eyes of many nations. At a time when the sovereign debt crisis hit Greece, and European countries went all out to prevent the crisis from spreading to other EU nations, the three US ratings agencies chose to add fuel to the fire by repeatedly lowering their ratings of Greece's and other debt-plagued European nations' sovereign debt.

As a result, these debt-ridden European nations faced a drastic rise in financing costs leading to some of them completely losing such financing ability. Also, the lowered credit ratings by Moody's, S&P and Fitch made investors extremely panicky and caused them to sell euros on a large scale. This was essentially equivalent to helping US hedge funds short-sell euros to profiteer at zero-cost risk.

Due to lack of competition, the US ratings agencies have long remained reluctant to increase their technological research capability and funding input to raise their credit and risk evaluation abilities.

It is expected that the recent report by China's Dagong will help the world break the US-led monopoly over the global credit ratings business. Ratings agencies in other countries too will be motivated to improve their own ratings methods by raising service quality and judgment standards. They will also make unremitting efforts to improve their risk evaluation ability through financial innovations.

In this sense, Dagong has not only safeguarded China's own economic interests, but has also contributed much to global efforts aimed at improving credit rating efficiency and quality, which will help in a healthy and steady development of the global economy.

Undeniably, China still faces a variety of challenges if it aims to succeed in acquiring a deserved say in the global financial market.

The first challenge facing the country is how to set up and popularize its own credit ratings brand. The creation of an accurate credit ratings report at an appropriate time will help China's ratings agencies gradually get the deserved attention of other countries and then win recognition.

At the same time, international capital will remain sensitive to reports emanating from China on the world's sovereign credit status, other than the biased index presented by US ratings agencies.

As China opens its financial market wider to the outside world, more foreign investors will flock to its credit market, thereby helping the country popularize its own credit ratings system.

Growing eagerness from across the world for its credit ratings report, together with its economic build-up and the consolidation of its financial institutions, will unavoidably lift China's say in this critical realm.

To facilitate this process, the country should try to increase the number of its trained financial talent and make its credit ratings system more scientific, objective and accurate, in order to acquire a deserved seat for its ratings agencies in the global financial market.

At a time when China is paying growing attention to financial innovation and striving to elevate the status of the yuan in the global monetary arena, the country should also fully acknowledge the importance of setting financial standards different from the Western world.

Only with the ability for standards setting can China be able to transform its financial expertise into real wealth and gain an advantageous position in the global monetary mechanism.

Despite the significant step made by Dagong toward this end, China still has a long way to go before getting a deserved say in the global financial market commensurate with its international economic status.

The author is deputy dean of the School of Economics and professor of finance, Fudan University