The (Delayed) Ascent of PRC Rating Agencies

There was another large controversy about Chinese firms operating Stateside three years ago when the PRC-based credit rating agency (privately-owned, mind you) Dagong was denied by the SEC from being granted Nationally Recognized Statistical Rating Organization (NRSRO) status. As IPE Zone readers know by now, NRSRO status is important insofar as gaining this recognition allows a credit rating agency to legitimately evaluate what is still the most liquid capital market of them all for dollar-denominated debt. Then, the SEC claimed that Dagong could not comply with the Feds' standards for tranparency if so required:

[W]e find that we must deny Dagong's application because, irrespective of the jurisdictional question, it does not appear possible at this time for Dagong to comply with the recordkeeping, production, and examination requirements of the federal securities laws.

The "jurisdictional question" concerns the Chinese SEC equivalent the China Securities Rating Commission (CSRC) having its own set of rules concerning access to such documents. At any rate, Dagong was partly culpable in not properly explaining how it would handle SEC requests for information about ratings in terms understandable to Westerner bureaucrats. Dagong even threatened to sue, but nothing came of it:

Chinese rating agency Dagong Global Credit Rating Co. called the Securities and Exchange Commission's recent denial of its application as an officially recognized bond rater in the U.S. discriminatory and said it considers taking legal action against the agency.

In a strongly worded statement posted on the company's website Sunday, Dagong said SEC's sole reason for denying its application is the commission can not conduct cross-border supervision over the Chinese firm.

At any rate, Dagong has not given up on its quest to become a global player in the ratings game. Aside from the publicity stunt of downgrading US debt from AAA status before S&P, it now has done what few PRC ratings firms are willing to do in downgrading local issuances regardless of the argument that the government always stands ready to bail out SOEs which constitute a large part of the Chinese economy:

At the end of June, Dagong Global Credit Rating Co. broke ranks with its local competitors and downgraded three bonds issued by infrastructure-construction companies wholly owned by Chinese cities. It said it was losing faith in the governments' backing of the bonds [...] The three bonds Dagong downgraded—for the infrastructure-construction arms of local governments in Jilin, Jiangxi and Hubei provinces—had their ratings lowered by only one notch and still are rated investment grade.

Another strategy aside from establishing an image of political independence at home is using Europe instead of the US as Dagong's Western beachhead:

Dagong's go-it-alone stance is a measure of its ambitions. Chairman Guan Jianzhong—a trained accountant who took over in 1998 and owns a chunk of the 20-year-old private firm, according to a person familiar with the company—has spoken bullishly about the need to break the lock-hold Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings have on global debt ratings. Dagong hopes investors would be open to a new ratings firm after the global financial crisis resulted in a major loss of faith in the established players.

European regulators have taken note. In June, before the downgrades, six European Union regulators approved the registration of Dagong's Milan-based unit, allowing it to rate companies in Europe. Dagong previously had been turned down by the U.S. Securities and Exchange Commission in 2010 after it applied to do the same in the U.S.

The best way to combat Western discrimination is to tell it like it is when handing out ratings, since being proven right by subsequent bond issuer performance is the best way to gain others' confidence. Besides, who exactly is going to argue that Western ratings firms are any good in this day and age? As bond issuances increase from China in particular and East Asia in general, the clout of Asian ratings firms should increase accordingly.

The lame 2010 NRSRO application aside which appeared to fail due to unpreparedness as much as discrimination, it's only a matter of time.