When I was asked to write a brief foreword to introduce this insightful study by Guan Jianzhong, I was elated to have the opportunity to discuss the major issues in the credit rating system. Today, while the financial stability is one of the main concerns of the globalized world, it too often seems that leaders in political and economic arenas are not yet aware of the crucial necessity to reform the credit rating tools and methodologies, especially since the devastating crisis of 2007–2008 showed that the credit rating method applied by Western organizations was not only imperfect but also potentially dangerous. 

A Study of Western Ideas

发布时间:2017-07-31 11:21:46    点击:

When I was asked to write a brief foreword to introduce this insightful study by Guan Jianzhong, I was elated to have the opportunity to discuss the major issues in the credit rating system. Today, while the financial stability is one of the main concerns of the globalized world, it too often seems that leaders in political and economic arenas are not yet aware of the crucial necessity to reform the credit rating tools and methodologies, especially since the devastating crisis of 2007–2008 showed that the credit rating method applied by Western organizations was not only imperfect but also potentially dangerous. Thus, the legitimacy of Western ideas on the matter has been significantly weakened. Two major useful inputs of this study is its clear and sharp description of the Western view on credit rating and its explanation the extent to which this ideological monopoly, in a market dominated by American agencies, was a source of failure in the risk assessment. In this short book, Guan Jianzhong methodically describes the origin of Western views on credit rating and examines its errors. Then, he outlines new ways of thinking to set up a more balanced, efficient, and acceptable credit rating system. As the chairman of the Universal Credit Rating Group (UCRG), Guan Jianzhong, a man of vision and determination who at the same time focuses on thought and action, deals with matter from an original and innovative point of view. In this respect, such a study will certainly contribute toward renewing the debate on financial stability and rating approaches in the coming years.

 

It is necessary to develop an Eastern view on credit rating

 

The first challenge of this study is to develop a critical method by which Guan Zianzhong can analyze Western ideas on credit rating both historically and scientifically. Considering with an objective eye, the dominant methodology of credit rating, in particular, the work processes of the Big Three credit rating agencies (Moody’s, Standard & Poor’s, and Fitch Ratings), the author remains lucid about the mistakes of the Western rating system. He suggests that we need to change and adapt the rating system to the new economic order by breaking the Western monopoly. Never more than before has it been so urgent and important to develop theoretical views on the main ideas governing credit rating. First, it has become increasingly important because of globalization, which has partly shifted economic power and influence from the West to the East. Second, the financial crisis highlighted three types of failure in major credit rating agencies: lack of confidentiality, lack of efficiency, and lack of independence with potential conflicts of interest. Above all, the crisis has revealed the limitations and shortcomings in existing methodologies and organizations. The three credit rating agencies obviously have responsibility for the global crisis given the under- and over-evaluation of credit risk. Undeniably, it is difficult to have full confidence in them. Learning from the past means changing what has not worked in the methods used by these agencies and rebuilding a more legitimate rating system. Taking lessons from the crisis also means that we need to set up a credit rating model with better regulation, better efficiency, and better representativeness.

Diversity in rating methods and rating tools is a way to avoid methodological biases by the Western monopoly

 

The study interestingly mentions the primary biases and failings of Western ideology underpinning rating practice. For instance, it points out how this Western hegemony has ignored the particular features of Eastern and Southern economies. As a matter of fact, the economic game has changed given the rise of emerging countries. However, instead of taking this into account, credit rating has been implemented as per the standards and criteria of developed countries. This is precisely why such a model does not fit the reality of the world economy. We now must overcome and give up the false belief that economic systems are homogeneous and thus, can be assessed on the basis of Western standards of evaluation. According to this approach toward creditworthiness assessment, the same tools and rules can be applied to all countries: creditor regions and debtor regions, and developed economies as well as emerging or developing economies, without any consideration for their internal and local specificities. This narrow view has already led the world to a dramatic situation. But the worst is yet to come if nothing is done to put an end to the Western credit rating privilege and promote diversity in rating standards. A good assessment of risk in financial and economic fields is more important than ever due to the increasing interdependencies in our globalized environment. This study is of great interest insofar as it raises the issue of why and how to create a more fair and adapted credit rating.

 

In response to the American monopoly, China provides an impetus to the renewal of credit rating, with a more representative system involving Asia, Europe, and other continents

 

Over the last decades, China has become the world’s second largest economy. Today, it initiates large-scale projects on a global scale and opens perspectives to stimulate world growth. For instance, the new Silk Road program, announced by President Xi Jinping in autumn 2013, is a huge opportunity to re-launch the economy through cross-border infrastructure projects and international investments involving between 30–50 countries such as China, Vietnam, Russia, Kazakhstan, France, Germany, and the United Kingdom. Within the framework of this ambitious initiative based on growing cooperation between the private and public sectors, Asia, South Asia, Europe, and Africa will develop ever stronger economic ties. The increasing links and rise of interdependency between dozens of countries from different continents with regard to the economy and finance will undoubtedly create the need for a stable and secure financial environment. In this sense, the new Silk Road also offers an opportunity to build a new credit rating system free from the dominant Western view. It also creates perspectives to develop new tools and operational structures of cooperation and alliances.

 

As one of the most powerful economies in the world in terms of gross domestic product (GDP) and as a major financial leader, China will have to play a primary role in defining the new credit rating approach. The post-crisis period and the beginning of a new financial era based on more regulation and more cooperation give momentum to reform. In this context, China can have a high level of responsibility. From a historical perspective, there are two ages of China’s development that can be observed over the past 35 years: economic and commercial on the one hand, and monetary and financial on the other. These two successive sequences represent China’s accession to the top ranks of the world’s economies, which play a leading role in world growth and stability. In the first economic phase, from 1980 to 2011, the growth rate of China was more than 10% per year on average, and the country gradually became one of the most powerful economies in the world on the basis of its growth in exports and manufacturing. Today, even with lower growth in the New Normal regime, it remains a leader in stimulating the world economy, such as with the new Silk Road project.

 

Then, in the second phase, which we can observe as the monetary and financial age, the Chinese currency gradually became increasingly crucial in world relations. China’s efforts led to the announcement of the International Monetary Fund (IMF) governance reform toward a fairer system in 2010. According to the IMF, the renminbi could soon be considered a global monetary reference by being included in the currency basket alongside the euro, pound sterling, yen and the US dollar. In any event, despite the many reservations and delays regarding the IMF decision, there is no doubt that the renminbi is now a major currency, which will be used increasingly internationally in the coming years. As a second aspect of this new era, the financial age, is related to the policies implemented to better regulate the banking and insurance sectors, and improve the internal financial system. Today, China has entered a new phase, and not the least important one, of its development. China is now reaching its financial maturity by developing its stock markets and issuing high-quality bonds to finance the real economy. In this age of monetary and financial globalization, the time has come to reform credit rating, provide new frames of credit assessment, and rebalance it by promoting new ideas new tools from the East and based on cooperation with the West.

 

In this study, Guan Jianzhong combines theory, observation, and practice to advocate change in the current rating system. His approach and objective are clear: they are about building a new credit model on the basis of international dialogue, diversity, and global governance. Reading this book, we hear the voice of a renowned scholar who leads research in the financial area that deserves to be developed and taught in the best universities, in China and abroad. Such an academic initiative associated with the rating practice of the UCRG symbolizes the ambition to bring together academic rigor and empirical methods used by highly skilled professionals. UCRG is, so far, a unique model and an innovative alliance of local rating agencies.