Serene to the point of impassivity, Guan Jianzhong does not look like a James Bond villain, but he sure can sound like one. Dagong Global Credit Rating, the Chinese ratings agency he chairs, has spent the past two years baffling and amusing the world.
For some, the Beijing-based firm is a minor corporate hero, downgrading and upbraiding the west’s unchecked addiction to debt when few others dared or cared to. To others, Dagong is a joke in a novelty cracker: at best, a diversion designed to generate profit and headlines.
Whatever your view, it is hard not to be a little impressed by Dagong’s sheer chutzpah. In November 2010, it downgraded the US’s sovereign rating to single-A plus from double-A, then slashed it again nine months later to a lowly single-A, citing concerns about the soaring US national debt and a budget last balanced 11 years ago.
Developed, indebted economy downgrades followed one after the other, like dominos. The UK was knocked to an single-A plus rating in May 2011 with a negative outlook. France came next. Peripheral or troubled Europe struggled most, damned in Dagong’s eyes: Italy, triple-B, downgraded in March 2011; Portugal, double-B plus, November 2011; and Greece, gleefully cut to a D default rating last month.
In November, Guan again hit the front covers, putting the US on notice, warning of an “inevitable” new ratings downgrade this year if its economic picture worsened.
Yet not all in the developed world are given the Dagong treatment. Australia, whose economy depends largely on China’s insatiable demand for commodities, is rated triple-A, with Germany and its vast current-account surplus dragged down to a stable double-A plus only by its links to the eurozone. China, blessed with cash to burn, and unsurprisingly favoured by Dagong, is rated triple-A, its highest notch available.
Guan seems to enjoy courting controversy. Sitting in his austere office in Beijing’s Chaoyang district on a particularly gloomy winter morning, he is quick to condemn the west’s profligate ways. “Debtor countries caused the financial crisis,” he states. “They were irresponsible.”
In his eyes, the only institutions worse than these wastrel governments are the big US ratings firms that, in his opinion, colluded supinely with western governments to create the financial crisis.
“It is up to these ratings agencies to provide impartial and objective advice; and if [they aren’t], they are destroying the financial system,” he says. “That is what they have been doing.”
There is a certain truth in what Guan says, even if his aspirations are perhaps lofty. “The current rating system cannot continue producing such unbalanced results,” he says. “It is our responsibility to promote reform of the global system to create a new global credit ratings order.”
Often, Guan’s epithets seem to be plucked from a Michael Crichton novel. He talks of seeking to change the ratings industry “because of our strong sense of a global mission”. His condemnation of the leading US ratings firms – Standard & Poor’s, Moody’s and Fitch – is unflinchingly if naively simplistic: “The fundamental reason why the financial crisis [occurred] is because the big-three credit rating agencies made serious mistakes in their ratings standards.”
And he wildly overvalues his firm’s global influence, suggesting that S&P downgraded France and the US last year only because they were following Dagong’s lead. “We are helping our rivals to correct their mistakes,” he announces high-handedly, adding: “They need to realize their rating information and assessments are wrong.
“[Our] reports have spread the influence of China’s credit rating agency to every corner of the world, from countries in the US and Europe to the Faroe Islands in the north Atlantic, and [we have] won unprecedented respect and praise for the credit industry in China.”
If Guan doesn’t actually describe Moody’s and S&P as capitalist running dogs, lickspittle enablers of a failed US economic hegemony, the sentiment drifts heavily through the polluted Beijing air.
Within a few short years, Dagong has become the world’s de facto fourth ratings agency, rivalled only – if an entry on Wikipedia’s main pages constitutes proof of such things – by its three, much larger US peers. It rates China’s friends – Venezuela, Kazakhstan – and enemies – Japan, India – alike, along with tax havens and oil-rich Gulf states. In February, it announced its intention to rate Belarus.
Yet its rise from nowhere has also created problems. Most glaring is a serious credibility gap. S&P and Moody’s might have been complicit in permitting the conditions for the financial crisis to flourish unchecked, yet their ratings are still at least recognized the world over. Dagong’s aren’t.
The firm might have planned its moment in the sun carefully, having decided in 2005 to begin rating sovereign nations five years before its first US downgrade. It might be impressively canny at grabbing headlines around the world, and its condemnation of the western banking system might have made Chinese – and more than a few foreign – bloggers, tweeters and prognosticators happy. And it’s not always wrong: debt ceilings are, after all, there for a reason.
However, viewed up close, the Dagong experience is thoroughly surreal. Take its offices in a utilitarian building. The hubbub of activity and gossip evident at, say, S&P’s offices in New York are conspicuous here by their absence. At 10am, virtually the entire 29th floor is empty, barring three receptionists and a DHL delivery man standing vacantly in a corner.
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| Guan Jianzhong, chairman of Dagong Global Credit Rating, the Chinese ratings agency |
Guan’s office is even more bizarre, containing a shin-height plastic sofa and a broad desk, atop which sits what appears to be a crystal ball. Outside, the freezing city is so polluted, it’s hard to see the buildings across the street. We settle in on the ludicrous sofa, with Guan – boyish and bespectacled, with a hint of grey around the temples and scuffed brown shoes – resembling a cut-price college don. Slowly, he is teased out of his shell and away from his determination to read from a pre-prepared script. No, he says, the US is not being singled out for a special scolding. “I don’t feel happy about [downgrading the US],” he says. “I feel heavy-minded acting this way, but we do need to expose the risks America posed and still poses to the world, so we felt it was our responsibility to downgrade [it].”
Yet as the conversation becomes more defined, Guan’s underlying beliefs start to trickle out. US rating agencies are beholden to the “western, liberal, capitalist, democratic” system obsessed with “privatization and liberalization” – and if, like China, you “aren’t those things”, you’ll garner a lower rating.
He bitterly complains about the “uncontrollable” level of US debt while grudgingly recognizing that the US will “never be a default risk” because “when that is about to happen [it] can just print more dollars by firing up the printing machines”.
In 2010, the SEC declined to approve Dagong as a Nationally Recognized Statistical Rating Organization, citing the company’s refusal to comply with US rules on cross-border supervision. Guan’s seemingly prickly riposte was that Dagong did not need US recognition anyway – despite having asked for it – certainly when it came “at the cost of China’s sovereignty”.
It is all rather scattergun, and herein lies a dilemma. First, it’s hard to dissociate Dagong’s headline-grabbing downgrades with Guan’s own thoughts. The company seems built in its chairman’s image and can appear as a mini-dictatorship where ratings are defined less by rigorous logic than by the pursuit of local political credibility.
Guan, who joined Dagong in 1998 as a junior analyst, is often accused by domestic competitors of lacking intellectual cohesion or, in some cases, even basic professionalism. “Some of his criticisms of the US are just plain crazy,” says the chairman of a rival Chinese ratings firm. “Some people here in China cheer him for slapping the US and raising China’s profile, but no one applauds Dagong for being a good ratings agency.
“No one takes them seriously, and no one thinks they have done a good job, for China or for the ratings industry. Dagong is basically just banging the drum for Chinese nationalism.”
This latter point is compelling. Nationalism – bitterness about past treatment at the hands of “imperialist” westerners, allied with pride about the nation’s resurgence – is a rising tide in China.
Guan rebuts suggestions that Dagong’s downgrades are politically motivated – although many of his rivals believe he is angling for promotion in the 2012/13 leadership transition. If he had “good reason to downgrade China”, he says he would do so.
Yet as long as Dagong continues to assess sovereign states using its own, narrow parameters, that is not going to happen. While Guan castigates western rating agencies for being obsessed with debt, private enterprise and liberal-democratic values, he talks up the attributes Dagong finds most attractive in a country: bounteous levels of foreign reserves, a controlled currency, rising levels of material and consumer wealth, high economic growth and a generous budget surplus. Happily, these are the very attributes that China, in its current guise as a protectionist mercantilist state, boasts in spades.
When it is suggested Dagong is merely a ratings mouthpiece for China’s economic growth model, Guan smiles briefly before retreating to his previous impassivity. “We don’t look at ideological standards and we don’t believe in them,” he says. “We are free, fair and balanced. I always set up Dagong to become a world-famous, global credit rating agency and we continue to strive for that objective.”
In another nod to differing US and Chinese economic models, he emphasizes the “importance of having a higher rate of GDP growth” when compared with the “lesser ability of being able to just print money”. He adds, tellingly: “Just because you are democratic, it doesn’t mean you can pay back your debt.”
In Dagong’s own internal sovereign rating methodology guidelines, published in September 2008, the company identifies six attributes used to assess creditworthiness. To gain a rating in the high As, any sovereign state must be solvent and able to create new wealth, maintain a high rate of economic growth, be financially secure, boast a sturdy ratings system and have a steady, controllable currency.
To secure a triple-A rating using Dagong’s template, a nation must boast a low debt burden, have a sophisticated tax generation structure and be able to guarantee long-term debt repayments. China succeeds here with room to spare.
Yet securing that highest-possible ranking also requires a nation to conform to a host of more nuanced conditions, notably: to be free of internal conflicts, including riots; to be in control of a developed, sophisticated and open financial system; and to get on well with neighbours and global institutions. No one outside the People’s Republic – and perhaps few outside the leaders’ enclave of Zhongnanhai in Beijing – would say that China passes any of these stress tests.
It might just be another happy coincidence that Dagong first moved into the black in 2010, 16 years after its birth, around the time it first started hectoring the west and banging the drum for China. Again, Guan offers a chilly smile, claiming that Dagong “does everything in the public interest. We aren’t profit oriented.” Then he adds: “Every year, we are going to be more and more profitable.”
Other ratings executives believe the company’s profitability lies not in its often combative attitude toward Washington, London, Paris or Athens, but in an ability to react quickly and fluidly to China’s $600 billion stimulus package.
One mainland specialist, now the head of a prominent US-Chinese ratings joint venture, and who worked with Dagong for 10 years, describes how it profited from the wave of money flowing into local government financing vehicles (LGFVs) in recent years.
“Before the financial crisis, Dagong was smaller than [domestic rivals] China Chengxin or Lianhe,” says the executive. The former boasts a JV with Moody’s; the latter with Fitch.
“Dagong was aggressive in 2010, giving ratings to LGFVs, even those from poor cities in western and northeastern China, or even to country-level [vehicles]. Dagong tended to hand these LGFVs ratings of double-A or higher so their bonds could meet the regulated minimum rating threshold for insurers to invest. China Chengxin and Lianhe turned down business, and really only Dagong was left playing the game on its own.”
And this was not a small market: LGFVs have issued bonds worth Rmb250 billion ($40 billion) since the start of 2009, market insiders claim.
Beijing rules stipulate that every rating costs the issuer Rmb250,000, though this target is loosely observed. This leads, notes one ratings specialist, to the creation of a system “that encourages rating shopping”. Nonetheless, if Dagong has had large parts of this market to itself – and had no competition from foreign ratings firms – it will have earned a tidy profit during the past few years.
The question now is whether, with LGFVs out of favour with the central government, and with bond issuance from local vehicles screeching to a halt over the past 12 months, Dagong can find a new way of making easy money. For its part, Dagong states that all of the company’s profits are generated by selling ratings to issuers.
Guan could have built a company respected around the world for offering fair and balanced ratings. It could have become a genuine and much-needed counterbalance to its chief US rivals. What he created instead is a mishmash of a firm, one that emphasizes and panders to the importance of China’s growth model over all others.
One can’t help feeling that if China were liberal, democratic and private enterprise-friendly, Dagong’s view on those “western” attributes would shift accordingly.
Or is it that the chairman and his company are merely pawns in a bigger game, willingly spreading Beijing’s new gospel of statist economic management to a troubled world?
It can hardly be accident that Guan proudly spotlights a specific article by French newspaper Le Monde headlined “China spreads its financial viewpoints through Dagong”. Or that Guan’s own business card describes him as both chairman and state council subsidized expert.
As the rival local ratings chairman notes: “Dagong could have done some real good, but they chose not to. I really don’t know why they are doing this. They ignore important factors such as economic resilience, political stability and the ability to borrow in the markets.”
Guan lets slip a final, telling statement before disappearing off to another meeting. “If China were trying to prop up its currency by printing more renminbi, it would create serious criticism of our actions. If we were doing the same thing, it would be a totally different picture, yet no one criticizes America. I really don’t understand this.”
