BEIJING, June 9 (Xinhua) -- Experts suggest that China should beef up its own credit agencies, against the backdrop of the ongoing sovereign debt crisis -- triggered by downgrades given by leading international credit rating agencies.
Behind the sovereign debt crisis, price setting is the most important precondition for market transactions nowadays, said Xiang Songzuo, Deputy Director of the Center for International Monetary Research at Renmin University of China, in an exclusive interview with Xinhua.
"Most individuals and even institutional investors are only price takers," he added.
Thomas Friedman, author of the bestseller The World Is Flat, calls Moody's and other leading rating agencies "superpowers," because they possess huge price setting power for securities and other financial assets, Xiang said.
Fitch Ratings last month cut Spain's credit rating one notch, about one month after Standard & Poor's reduced Greece's to junk status. The downgrades triggered fluctuations on global stock, commodity and foreign exchange markets, as the ratings fueled new fears about euro zone public finances.
Credit rating is only one part of western financial infrastructure. Western financial markets have problems in terms of regulation and market incentives. Sometimes rating results given by the leading rating agencies can be quite subjective, said Xiao Geng, a renowned Beijing-based economist.
Standard & Poor's in 2003 rated 13 Chinese large banks as junk grade. This put these lenders in a weak bargaining position when looking for overseas strategic investors. However, major rating agencies gave inflated ratings to risky mortgage investments years ago that later imploded.
"We should improve our own rating agencies. But this is not an easy task, and we should do it step by step. We can not build a world-class rating industry without a well-developed financial market," said Xiao, Director of the Brookings-Tsinghua Center for Public Policy at Tsinghua University.
"In order to reduce the dominant price setting power of the three leading rating agencies, other countries should develop their own ones. But if you want to gain equivalent credit rating influence, your financial markets and currencies should be strong enough to compete with Wall Street and the U.S. dollar," Xiang added.
"It involves an improvement of our legal system and accounting system to build the Chinese financial sector into a world-class one," said Xiao, also a senior fellow at the Brookings Institution.
Industry insiders said that foreign credit agencies occupied a 60-percent-plus market share in China and there is no world-famous domestic Chinese rating agency. Most of China's small rating agencies only have ten-year experience and lack global recognition.
However, experts say China needs its own successful credit rating agencies to have greater international pricing power, as increasingly more Chinese firms are listed in foreign markets and a big chunk of the country's foreign exchange reserves are put into overseas financial assets.
"To enhance the reliability of the rating industry is a global issue and the world should make joint efforts through platforms like the G-20 meetings. We can encourage competition in this sector to increase transparency. In that sense, Chinese rating agencies can rate U.S. banks one day," Xiao added.
Zhou Xiaochuan, governor of the People's Bank of China, the central bank, called for concerted international efforts to strengthen supervision on rating agencies and seek effective supervision methods, at the meeting of the G20 finance ministers and central bank governors held in South Korea last week.