A press conference of the People's Bank of China in March
A press conference of the People's Bank of China in March
Sun Xingjie

-Commentary-

BEIJING — Seeing a strategic opportunity to dilute the global monopoly of the three major credit rating agencies, China and Russia recently announced plans to establish a joint credit rating agency. The idea is that it would evaluate Sino-Russian cooperation projects, then eventually enter the international market.

But there is a deep divide between desire and reality. Credit rating agencies are a key link to financial markets. A government can't properly develop one simply by signing a piece of paper.

The world's "Big Three" ratings agencies — Standard & Poor's, Moody's and Fitch — account for 95% of the world market, which can definitely be regarded as a monopoly for the West. The current situation not only displeases Russia, but it also irritates some in the European Union. Although Fitch is a European-owned agency, the UK is not a eurozone country.

Russia is particularly sensitive to financial hegemony these days. International rating agencies continue to lower Russia's sovereign credit rating, which is now just a grade higher than junk status. It is suffering from the cold current of a capital outflow. In fact, during this year's first quarter, more than $60 billion has left Russia, more than the whole of last year. The adverse effect on the Russian economy is likely to lead to a shrinking GDP this year.

Successive rounds of sanctions from the West have threatened the soft underbelly of the Russian economy. Highly dependent on energy exports, Russia doesn't have its own international settlement and payment systems. Its energy exports rely on Europe and American systems, so if Europe and America jointly adopted sanctions against Russia similar to those in place in Iran, it would be obliged to seek an alternative.

It's in the face of such a devastating situation that the government of Russian President Vladimir Putin is promoting this financial cooperation with China. But it's not so easy to change the world's credit rating landscape. During the European debt crisis, eurozone heads of state were very dissatisfied with the agencies' practices, which in some cases exacerbated the problems by lowering the ratings for countries in difficulty: the harder the financing and the higher the cost, which creates a vicious cycle.

It is because of very low ratings that countries such as Greece and Portugal couldn't obtain market financing and were obliged to accept international aid.

Meddlesome but crucial

But eurozone countries can't interfere with these agencies. Investors believe in the agencies' judgment. To a certain extent, credit rating agencies affect investor decision-making. And that's why they exist — because the financial market is full of risks. Investors can't possibly maintain a full grasp on all relevant information, so they require the advisory services of these specialized institutions.

The Big Three didn't gain their virtual monopoly status by force but by credibility. Baptized by more than a hundred years of market competition, they have accumulated unshakable reputations and positions in financial markets. If these agencies weren't able to come up with fair, objective and unbiased judgments, then investors wouldn't have trusted them and they would naturally have been eliminated from the market.

After the 2008 financial crisis, the three major rating agencies were criticized for not delivering an advance warning. Ratings agencies are, to a certain degree, meant to play the role of crow. During the eurozone crisis, they collectively became the crow and downgraded various countries. The United States, for example, lost the gold-plated AAA rating it had enjoyed for so long, annoying President Barack Obama tremendously.

A Sino-Russia agency could only rival the Big Three if the international market wanted it to, but the will of two governments is not enough. Without independence, the credit rating agency would dig its own grave.

Currently, Russia's rating agency is in its infancy, with only 18 employees. Meanwhile, China's Dagong Global Credit Rating has launched global strategies and obtained a ticket for entering the European market. Apart from Dagong, there are several other Chinese rating agencies forming a competitive structure. In contrast to China's market-oriented approach, Russia is assigning its first deputy prime minister the job of creating an agency.

The rating agencies are an inevitable component of well-developed financial markets. Neither China nor Russia is yet a true financial power. Before a financial market is fully developed, there won't be much market demand for credit rating firms. So rather than hastily teaming up to establish a rating agency, the two countries would do better to accelerate their financial reforms and cooperation. A credit rating agency would emerge naturally from such market competition.

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