Amidst all the pontificating over the European bank stress tests, whose significance is rather less than advertised, a small news item went largely unnoticed.
But, in our view, this other story could well say more about the economic future than learning that a couple of ailing Spanish cajas failed their tests, to no one’s real surprise.
The French and the Germans have talked about it, but the Chinese actually did it: they launched a new, non-Anglo-American credit rating agency. Let that sink
in for a moment, please, because we are convinced that markets will be taking this new agency seriously in the not too distant future.
With Standard & Poors, Moody’s and Fitch downgrading the usual southern Europe’s suspects – Portugal, Greece and Spain – they have once again provided ample ammunition to their critiques, who liken them to pyromaniacs who join the fire department: they only downgrade a credit when it nears irrevocable default (and everyone already knows about it).
China’s new Dagong Global Credit Rating surveys more than fifty sovereign debt issuers. And it does so without taboos.
The US, with its supposedly riskless debt, gets an AA rating; the UK and France a mere AA-. Italy, Spain and Belgium are at A-; while Germany, Canada and the Netherlands fare better, receiving the same AA+ rating as China. The maximum rating, AAA, is only granted to Switzerland, Australia, Norway and a few other economically less important countries.
Of course, we can question the ideological intent of Dagong’s ratings. We can be reasonably sure that the political powers in China grant it little independence. But, however we judge its objectivity, we would be unwise to dismiss its ratings out of hand.
The new Chinese rating agency holds up a valuable mirror to Western countries. We need to acknowledge the real warts and blemishes it reveals. Within the next couple of years, given their current fiscal paths, the public debt-to-GDP ratios of US, France and, to a lesser degree, the UK, which has at least started to do something about it, are going to surpass the 100% threshold. This will surely spell the end to their precious AAA ratings at some point. The traditional rating agencies will have to downgrade their sovereign debt.
In this sense, we must acknowledge that Dagong is only anticipating the inevitable. We believe this is exactly what a rating agency is supposed to do. At least by this standard, Dagong seems more credible than the Big Three agencies. And given that China holds over a trillion US dollars in US debt, it is slightly astonishing that Dagong had the courage to downgrade the US and risk undermining China’s own massive US holdings.
To those who scoff at the idea that a Chinese agency could some day wield the same influence on the markets as the big three agencies should not forget one thing: Dagong is an agency of a creditor country, while Standard & Poors, Moody’s and Fitch all represent debtor countries. If you were lending money, who would you trust more, the self-assessment of the borrower, or your own judgment?
In our view, Dagong’s ratings are yet another small but significant step in the reshuffling of the global economic order. Slowly but surely the center of economic gravity is shifting from west to east, from developed to emerging countries.
After all, in the end, the one who pays always calls the tune.
A couple of thoughts on Dadong:
ReplyDelete1. China is the only country that is given a higher foreign currency rating than a domestic currency rating. Rather strange, no?
2. The point of foreign currency ratings is to give investors an indication of risk when investing in foreign currencies. But what is the point of that when Chinese investors are largely constrained and cannot freely invest abroad in the first place?
3. The reason rating agencies are so important is because regulations in the US and Europe made them important, by introducing rating requirements in various rules. The tide is turning, and the G-20 is busy removing these requirements from legislation and rules. The recent financial reform act in the US is the first of many such changes underway.
Don't get me wrong: there is a need for a Chinese rating agency to rate issues in the domestic market. India has several agencies already. But the need for an international rating agency is getting less obvious as international regulations become less reliant on them. By the time Dadong establishes enough of a track record to be relevant, and Chinese capital controls are relaxed enough to make ratings useful, the need for such ratings would have fallen off a cliff!
All this to say, it is a publicity stunt, nothing more. As a side note, Dadong is also the name of a fine restaurant in Beijing, serving the best duck I've had anywhere. Now that is a Dadong I am willing to bet on!