Chinas National Association of Financial Market Institutional Investors is planning a credit rating firm that will charge investors rather than borrowers for risk assessments, according to a person familiar with the matter.
China Credit Rating Co. will be funded by the association, known as NAFMII, though the venture will operate independently with its own board of directors, the person said, asking not to be identified because the information is private.
The ratings system developed by Moodys Investors Service, Standard & Poors and Fitch Ratings is irrational and cannot truly reflect repayment ability, Dagong Global Credit Rating Co. Chairman Guan Jianzhong said in July, when the Beijing-based company ranked U.S. government debt below that of China citing a widening budget deficit. The Securities and Exchange Commission said on Sept. 24 that it turned down Dagongs application for U.S. debt rating status.
S&P, Moodys and Fitch drew criticism in the U.S. from investors and officials including Financial Crisis Inquiry Chairman Phil Angelides for assigning top rankings to mortgage- linked securities that crashed when the U.S. housing market collapsed in 2007. Senator Al Franken, a Minnesota Democrat, said in May that theres a staggering conflict of interest in the credit ratings industry, where issuers shop around for the best ranking.
The ratings companies have defended themselves against the criticism.
The current model where borrowers pay to get credit ratings that will attract investors causes a strong beneficial alliance between the issuer and the ratings agency that cannot avoid influencing the agencys independence, NAFMII said in a draft 94-page report seen by Bloomberg New in July.
NAFMII was formed by the Peoples Bank of China in 2007 to help develop the countrys over-the-counter financial markets, which span bonds, loans, foreign-exchange, commercial paper market and gold.
The association will announce the formation of China Credit Rating on Sept. 29, the person said. The firm will re-rate debt that has already been graded by Chinas private firms, the person said.