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Two weeks ago, when the world’s primary attention was on the outcome of the CPC’s 19th National Congress and its potential impact on China and the rest of the world, acute observers of Chinese affairs took notice of another piece of seemingly insignificant news: China sold US$2 billion in bonds at record-low interest rates in the international debt markets 11 times oversubscribed, which was seen as a sign of investors’ confidence in the financial health of the world’s second-largest economy.
It is also noteworthy that the bond sale followed credit-rating downgrades of China this year by international rating firms Moody’s Investors Service and S&P Global. Both graded China the equivalent of an A+ rating, which is several notches below their rating of the U.S., citing what they considered to be rising economic and financial risks in China.
Right after the downgrades, China’s Finance Ministry slammed the raters’ assessments, arguing that China’s economy is stable and gathering momentum. It proceeded with its bond sale without having the securities rated, and in a statement earlier said the international raters have misread China’s signals on economic development and growth potential. It urged investors in the international debt markets to make objective assessments of China’s creditworthiness.
It has turned out to be the case. It is crystal clear that China’s economy is outperforming any other country in the world with its robust, resilient and innovation-driven growth. It’s absolutely certain that China will achieve its annual growth target of 6.5 percent this year. Given China’s massive economic size, the growth rate and the sheer added value of US$740 billion are stunning!
To my knowledge, this was the first time that a nation has sold dollar bonds without credit ratings conducted by one of the so-called Big Three, namely, Standard & Poor’s (S&P), Moody’s, and Fitch Group. Normally, no nation could sell its debt at low interest rates without credit ratings.
The event signals that either the Big Three must adjust to acclimate to the new reality of China’s economic standing or get left behind amid the profound global changes.
To most Chinese, it is mysterious that Moody and S&P would downgrade China’s international ratings. It was like a teacher who fails a top student without reason, perhaps simply because the teacher has the power to do so?
A brief overview of the Big Three may lend understanding to their roles in international debt investment ratings.
S&P and Moody’s are based in the U.S., while Fitch is dual-headquartered in New York City and London. That they are all tools of U.S.-European powers manipulating the global economy is beyond argument.
Backed by the governments of the U.S. and Europe through legislation and other means, the Big Three are monopolizing global market share of “roughly 95 percent,” with Moody’s and Standard & Poor’s accounting for approximately 40 percent each, and Fitch around 15 percent.
According to an analysis by Deutsche Welle, “their special status has been cemented by law — at first only in the United States, but then in Europe as well.” From the mid-1990s until early 2003, the Big Three were the only “Nationally Recognized Statistical Rating Organizations (NRSROs)” in the United States.
These facts contradict the principle of free competition hyped by the U.S.
All the rules of the game are elaborately designed to favor players from the U.S. and Europe.
Are they playing fairly and professionally in their business? Maybe so in many cases, otherwise they would be ineffective.
But numerous examples have proved that they played a disgraceful role at some critical moments, such as their favorable pre-crisis ratings of insolvent financial institutions like Lehman Brothers, and risky mortgage-related securities that contributed to the collapse of the U.S. housing market.
In the wake of the financial crisis, the Financial Crisis Inquiry Report called the “failures” of the Big Three rating agencies “essential cogs in the wheel of financial destruction.”
In seeking profits, they could sell garbage like gold as they did when they slapped triple-A ratings on subprime securities even as the underwriting deteriorated — and as the housing boom turned into an outright bubble between 2005 and 2007.
In a sense, they are “legal” racketeers. Their unprofessional gratings often bring unnecessary harm to their victims.
Unless the credit rating firms are under authoritative scrutiny, say, from an international committee, their rating reports will grow increasingly insignificant.
(The author is an English tutor and freelance writer.)