A Competitor for Credit Rating Agencies

China may start its own credit rating agency, according to the Financial Times. The success of this business would be nearly impossible. Troubled sovereigns already must deal with the analysts from S&P, Fitch and Moody’s. The burden of aiding more analysts who want to scrutinize the countries would be too great for those countries to carry.

A Chinese regulating agency would lack credibility if it grades the debt of local governments within the People’s Republic. There are already suspicions that the government hides the strength or weakness of local banks. A credit rating operation’s results would be viewed as suspect by investors both inside and outside of China.

The most important role of a Chinese credit research firm would be to check the value and risks of debt issued by sovereigns from the U.S. to Japan to the eurozone. Any real assessment cannot be done totally from the outside. That is why teams of analysts from the “big three” credit rating firms travel to countries to make their own assessments.

In some European nations, financial ministries accommodate examiners from the International Monetary Fund and eurozone officials as well. The amount of time given to all of these examiners is tremendous. And the results are questionable, at least in the opinions of the governments that often challenge the negative ratings results of their sovereign paper. Those challenges do very little to reverse the damage done by downgrades.

China may launch its own credit rating firm, but its efforts will not help China’s investment decisions. There is no reason for sovereigns to help it. And, without that help, any ratings would be hollow.

Douglas A. McIntyre