Hitting the buffers

“Did Dagong downgrade us too?”

“A stunning lack of knowledge… they drew exactly the wrong conclusion… really terrible judgement… they’ve handled themselves very poorly.”

Such was the broadside delivered by Tim Geithner as he attacked Standard & Poor’s decision to downgrade the US government’s debt rating.

Of course, it wasn’t the first time the US had lost its coveted triple A. Well ahead of the curve was Dagong Global Rating, which last November slashed America’s rating to a mere A+ (see WiC87).

On August 3 it cut it even further to single A. “The US government’s solvency is decreasing and crumbling,” Dagong’s plucky boss, Guan Jianzhong told the South China Morning Post.

As the new kid on the block, the Chinese agency has enjoyed widespread attention for its outspoken sovereign ratings (it has the US just five notches above junk, for example, and ranks it less creditworthy than Chile or Malaysia).

But like S&P, Dagong is also discovering that high profile agencies become targets of the critics too.

In Dagong’s case, this relates to the Chinese media response to a rating it has given to the Ministry of Railways.

Some context here: since the high-speed train crash in Wenzhou (see WiC117), the Rail Ministry has become a lightning rod for journalistic ire. Aside from confirming many in their view that Ministry bureaucrats are arrogant and corrupt, the tragedy has severely damaged confidence in its costly new bullet train network. So the fact that the ministry’s credit rating has come under the spotlight is no major surprise.

The Ministry of Railways – which builds, owns and operates train lines – is also heavily in the red. Its massive infrastructure spend has seen it run up Rmb2 trillion of debt, incurring an annual servicing cost of close to Rmb150 billion. Nor are its operations currently very profitable. In July it was revealed that the Railway Ministry made a paltry Rmb15 million last year.

Yuan Weishi, a professor with Sun Yat-sen University, says that – based on that level of profit – it will take 13,400 years for the Ministry to pay off just the Beijing to Shanghai section of the bullet train network.

The bond market seems to be aware of as much. According to the Oriental Morning Post, a railway bond issue failed to attract a full subscription last month – for the first time ever.

The Ministry had wanted to sell Rmb20 billion of short term bonds, but only Rmb18.73 billion were purchased.

That’s where Dagong’s rating caused a stir. Ahead of yet another financing exercise on August 8 – set to raise a further Rmb20 billion at a coupon of 5.22% – Dagong rated the Railway Ministry at AAA. 21CN Business Herald was among many to express derision at this verdict. It pointed out that Dagong rated the Chinese sovereign at only AA+ (for both domestic and foreign debt).

“In other words,” observed the newspaper, “the Ministry of Railways’ credit rating is higher than China’s sovereign rating.”

China Business News also called Dagong’s decision “a violation of common sense”. It asked: “If the Ministry of Railways is dependent on the central government for security, its credit rating should be less than or equal to China’s sovereign rating. How can it go above the grade of China’s sovereign credit?”

Gang Meng, director of Dagong’s rating department, then tried to explain the logic behind the rating. The ministry had an “extremely strong” ability to repay, he insisted. He added: ”The reason for giving the AAA rating is that in our view the Ministry of Railways is not a separate legal entity, but a state organ, also a corporate, and this dual identity suggests the bonds issued have the central government as an invisible guarantor, belonging to the national debt.”

Confused? Media critics regard the rating as highly politicised – given the Ministry’s colossal funding needs. But CBN didn’t mince its words, calling it a “freak” assessment. Then again, perhaps it shouldn’t be regarded as that much of a surprise. According to National Business Daily, Dagong has given 156 government-linked companies AAA ratings in the past year.

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