Golden Fleece

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China – its national economic success to date and its vast local population focus any risk-taker’s mind and appetites on that place, Covid notwithstanding. So, it’s with interest that this observer read a recent article in the Financial Times (FT) highlighting some additional caveats to think about, a useful benefit from objective reporting.

In their piece “China Suspends Top Credit Rating Agency as Defaults Hit Market” (12/15/20), the FT reporters write, “China has suspended one of its top credit rating agencies after a former executive was accused of taking ‘massive’ bribes, as a growing pile of defaults rattle the country’s USD 4 trillion corporate debt market…”

To clarify, the FT reports that the China Securities Regulatory Commission (CSRC) suspended temporarily the Golden Credit rating agency, and is prosecuting the agency’s former executive, Jin Yong Shou, for bribe taking – with that malfeasance apparently related to the agency’s biased coverage of Shandong Ruyi, the country’s largest textile manufacturer and now set to default.

Golden Credit is not the only one receiving censure. Chinese regulators suspended Dagong, another rating agency, in 2018. And the authorities are investigating China Chengxin, another rater, for maintaining a “AAA” opinion for the miner Yongcheng Coal up until the point of the company’s default.

One can infer many things from the climbing number of corporate defaults in China and the attendant local rating agency onslaught. One thing, not to make too fine a point, there is graft there, just as there is anywhere. People do take bribes the world over.

The fact that the CRSC has been reacting, and seeking to move against rating agency improprieties should be encouraging. One could also say that the rating agencies themselves are still relatively new, perhaps still callow. Their errors, such as they may be unfolding, could be due to inexperience in addition to the transgressions done by bad actors in their organizations.

But, what’s interesting to think about is the choreography – let’s change the names for the lead characters in the above performance. How would it look? Let’s say that instead of Dagong or Golden Credit, Moody’s and S&P were guilty of bribe taking and cooking their results, thereby facing suspension. Well, maybe that doesn’t sound so far-fetched, actually. But that’s maybe being too harsh…

The US has had its share of institutional miscreants. Richard Whitney, the patrician head of the New York Stock Exchange, had been arrested on embezzlement charges, when he was at the helm of that venerable organization in the 1930’s. Subsequent comparable episodes over ensuing decades at times jostled the public trust, but that item “the public trust” has – to trot out a standard metaphor – only registered some bending, while not breaking since Chairman Whitney’s day.

As for recent times, and in fairness to the US rating agencies regarding their securitized credit opprobrium, those actors demonstrated perhaps “willful ignorance”, certainly venality, rather than genuine larceny. For the capital markets in China, it’s again noteworthy that the CSRC is pursuing the named local rating agencies for malfeasance. That’s a good thing.

But that said, like any two patients subject to an illness or some allergic reaction, the one with the stronger constitution will probably fare better. In MMD’s work and in these pages, country institutions – the economic, political, legal societal agreements, such as binding law, governing how people interact – are critical to a nation’s durable success and welfare. They are because they establish greater certainty and foster public trust, weak or brittle institutions preclude these things.

The CSRC’s actions can be seen as a positive step, but one taken in the context of an environment that might be murky and vulnerable to self-dealing. Again, self-dealing and tilting the always extolled level playing field are very human behaviors, they’re evident in some manner everywhere.

What tempers these behaviors is information, the free flow of information. We note that the World Bank shows the US percentile ranking for its World Governance Indicator (WGI) on “Voice and Accountability” at 78.8, a robust albeit not immaculate level of public transparency and free expression. The People’s Republic of China comes in by the same measure at 6.4. Lenders and investors should take note and parse the environment, accordingly.



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