Guan Jianzhong is waging a one-man crusade to change the global credit rating industry.
His argument: China and other cash-rich developing nations shouldn't have to rely on ratings agencies in the deeply indebted United States — especially after they helped fuel the global crisis that plunged the U.S. and then Europe into economic turmoil.
The credit rating company that Guan leads, Dagong Global Credit Rating Co., is little known abroad and only issued its first ratings of government debt in 2010, declaring the United States a worse risk than China. Its announcement caused barely a ripple. Months later Standard & Poor's cut America's prized AAA rating in the first such downgrade of U.S. government debt in history.
Now, the Chinese upstart is trying to attract foreign customers, promoting its own system that Guan says might serve emerging economies better than global agencies Moody's, S&P and Fitch. He accuses them of improperly basing ratings on Western political standards and treating heavily indebted U.S. and European governments too favorably.
"China is a creditor, so it should have a say in ratings," Guan said in an interview, referring to Beijing's $3.2 trillion in foreign reserves. "It should make ratings for the debtors. It should not be the debtors making ratings for creditors."
Guan's open criticism of his Western counterparts is unusual for his arcane industry but resonates with the ambitions of Chinese entrepreneurs to compete abroad and demands by the communist Beijing government for a leading role in managing the global economy.
It also echoes complaints in other developing economies that Western ratings fail to give them full credit for economic reforms and growth. Critics say that forces their governments, companies and consumers to pay too much for credit.
Rating agencies play a key role in finance but got little public attention before markets froze in the 2008 crisis. Then the major agencies suffered a huge self-inflicted blow to their credibility after investors lost money on mortgage-backed bonds and collateralized debt that had been rated low-risk. The U.S. government's Financial Crisis Inquiry Commission said the crisis "could not have happened without the rating agencies."
"Ratings led to the crisis," Guan said.
Today, rating downgrades are front page news as Europe struggles to resolve its debt woes.
Chinese President Hu Jintao called at an economic summit in 2010 for a more accurate system. Other officials say the world's second-largest economy needs its own ratings agencies but have talked only about having them serve China's fledgling markets.
Guan says he is acting on his own when he calls for a Chinese role in the global industry and new standards. He said Dagong is privately owned by him and two other investors and has little contact with Chinese officials.
"We have to adhere to independence," Guan said. As for China gaining a bigger presence in the global industry, he said, "when I talk to government officials, they don't understand and aren't even interested."
Dagong, founded in 1994, is China's biggest domestic ratings agency but tiny by global standards, with 500 employees on three floors of a Beijing office tower — a fraction of 150-year-old S&P's 6,300 employees in 20 countries.
Dagong says it has issued credit ratings for about 1,000 Chinese companies, while Moody's has rated 12,000 companies and 25,000 government debt issuers.
Guan joined Dagong in 1998 after working for a government company that imports aircraft for Chinese airlines. He visited New York on business and said seeing Wall Street trading showed him China would need ratings agencies as it developed.
"I wanted to do things, and to do big things," he said, sitting on a leather couch in his wood-paneled 29th-floor office, which includes an aquarium with oversize goldfish, a Chinese symbol of prosperity.
"I wanted to show my ability to do things no one else had done and to make some kind of breakthrough," he said.
Beijing created a ratings industry in the 1980s to help modernize its financial system but its judgments carried little weight because officials controlled which companies could issue bonds. The industry has grown as Beijing has tried to improve efficiency by starting to build a market in recent years to trade corporate bonds.
Guan argues that global ratings agencies improperly favor Western-style democracies with high incomes. He said Dagong's system, which cost 20 million yuan ($3 million) to develop, aims to give more objective treatment to economies that are financially sound but are poor or lack democracy and companies that have strong balance sheets but are in a country with a weak national rating.
"There is no link between a country's political system or its per capita gross domestic product and its ability to repay its debts," Guan said.
Dagong has announced agreements to issue ratings for the government of Belarus, which has been downgraded repeatedly by major agencies, and Portugal's Banco Espirito Santo.
Scott Kennedy, an Indiana University political scientist who has written about Chinese ratings agencies, said Guan has legitimate arguments but Dagong is too small and inexperienced to change the global system.
"He seems like a guy with a chip on his shoulder who is very nationalistic," said Kennedy, who said he has met other Dagong managers but not Guan.
"There is something legitimate and principled about his concern about dominant rating agencies, and that is worth thinking about," Kennedy said. "I just don't think he or Dagong is the one with the ability to challenge the ratings agencies and change the way financial markets deal with risk."
The major agencies say they apply the same criteria to all economies. Their published criteria for deciding a sovereign credit rating make no mention of political systems and cite factors including respect for property rights, ability to fight corruption, consistency of government policy and the possibility of unrest.
Moody's says high economic output per person is "the single best indicator of economic robustness" and ability to repay debts.
Asked to respond to Guan's criticism, S&P said it uses "globally consistent" standards.
It isn't clear the world needs a new system, despite criticism of the major agencies after the crisis, said Anastasia Kartasheva, an expert on risk management at Wharton School of Business. She said they bungled ratings on asset-backed securities but did well in the areas targeted by Dagong — sovereign and corporate debt.
"It's not as if the Chinese rating agency is offering ratings in a class where the other agencies performed poorly," Kartasheva said.
In its debut sovereign ratings in 2010, Dagong gave U.S. government debt a grade of AA, below its AA-plus for China and the super-safe AAA awarded by Moody's. At a news conference then, Guan said the Western ratings industry "provides the wrong credit-rating information." He pledged to "break the monopoly" of the major agencies.
Later that year, Dagong cut the U.S. rating further to A-plus.
Last year, Dagong attracted attention by being first to cut ratings for France, Spain and Austria ahead of similar reductions by S&P and Fitch.
But its ambitions for a bigger presence abroad have suffered setbacks that highlight the political hurdles in China's government-dominated economy.
It applied to operate in the United States but was rejected by the U.S. Securities and Exchange Commission in 2010 amid a dispute over Beijing's reluctance to allow American regulators to inspect Chinese accounting firms that work for companies with shares traded on U.S. exchanges.
According to the SEC, Chinese regulators said that until the inspection dispute is resolved, they would not discuss issues such as whether Dagong would be allowed to comply with U.S. rules requiring it to divulge information about clients.
Guan said he saw a different motive for the rejection: U.S. concern that Dagong might give American companies lower ratings and rattle investors.
"China's rating market is open to the United States and its companies can enter our market, while the U.S. market is not open to Chinese rating agencies," he said. "This is a double standard."
Dagong will face hurdles persuading investors it is making judgments independently in China's heavily regulated economy, where its customers are state companies, said Wharton's Kartasheva.
Last year, Chinese commentators questioned Dagong's decision to award China's Ministry of Railways a AAA rating despite its debts of 2 trillion yuan ($300 billion). Dagong citing the ministry's support from the deep-pocketed government but critics questioned whether the agency was rigorous enough.
Still, Dagong might find a profitable niche explaining China's borrowers to foreigners and global markets to Chinese investors, said Kartasheva.
"They clearly could expand in Asian markets," she said.
Dagong Global Credit Rating Ltd.: www.dagongcredit.com