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Incorporating Equitable Credit Ratings into the Global Economic Remediation and Governance System: WCRF Addresses Five Essential issues for the Global Economy

Aug 10, 2016 11:14 AM Author Font:TTT

The World Credit Rating Forum (WCRF), jointly sponsored by Universal Credit Rating Group (UCRG) and Dagong Global Credit Rating Group, was held in Beijing on July 18th, 2016. Under the theme of credit ratings and the global economy, the Forum focused on four topics: 1) The impact of credit ratings on the global economy; 2) New model for linking ratings with capital flows along the ‘Belt and Road’ economies; 3) Forecasting of the second global credit crisis; and 4) The importance to the world of building China’s credit system. The Forum also released a statement that it is essential to incorporate equitable credit ratings into the global economic remediation and governance system.

The Forum strove to discuss and answer the following three questions to establish a stable and dynamic environment for economic development:

1. How to incorporate equitable credit ratings into the global economic governance system?

2. How to distinguish equitable or correct ratings apart from inequitable or wrong ratings?

3. How to accelerate the establishment process of the credit-based economic system in China in order to provide further guidance for the credit-based economic systems in Asia and in ‘Belt and Road’ countries?

Participating guests stated that by strengthening investments in infrastructures along more than 50 countries, the ‘Belt and Road’ initiative will not only foster development in Asia, Europe, Africa and the Middle East, but also increase trade as well as cultural and political links between the stakeholders. Through building innovative tools of risk evaluation for infrastructure projects, integrating legal, financial and environmental criteria, credit rating could play a major role in the success of the ‘Belt and Road’ and of future projects.

Mr. Lian Weiliang, Deputy Director of the National Development and Reform Commission (NDRC) of China, made a keynote speech at the Forum. He pointed out that the new regulatory framework, with credit as its core, is playing an increasingly important role in China’s economic transformation and development. Moreover, credit ratings are underpinning the formation of China’s social credit system. Therefore, we need to develop the credit rating industry inside China on a large scale and in a rational way. Mr. Lian also noted that the faster we expect the credit rating sector to develop, the greater efforts we need to make to support the self-improvement of credit rating agencies and enhance their talent training systems. By strengthening the research and development in rating theories and techniques, we can enhance China’s core competitiveness and status in the international community.

Mr. Lian emphasized that the rapid growth of China’s credit rating industry requires us to follow the Go-Global strategy and the One-Belt, One-Road initiative. Specifically, we need to share resources and tap each country’s advantages by broadening international cooperation and exchanges in credit ratings, while simultaneously increasing service capacity by expanding the coverage of foreign investment, international trade, production capacity cooperation, and other sectors by credit rating firms.

Mr. Guan Jianzhong, Chairman of UCRG, made a keynote speech entitledIncorporating Equitable Credit Ratings into the Global Economic Remediation and Governance System. He noted that the world has not seen visible effects from the remediation and governance of the global economy. The fundamental cause of this outcome is that the remediation and governance of the global economy has deviated from the inherent laws of the credit based economy, and has not incorporated an equitable credit rating system into the global economic governance and remediation system.

To further demonstrate his statement, Mr. Guan presented the following statistics. Compared to 1998, the United States’ gross national debt in 2008 increased by 122.0%, while its GDP increased only by 61.9%; the ratio of debt to GDP increased from 269.7% to 369.7%. During the same period, for Euro-zone countries, their gross national debt increased by 111.2%, while total GDP increased by 98.2%; the ratio of debt to GDP increased from 271.1% to 289.0%. During the same period globally, gross debt increased by 114.1%, while the total GDP increased by 101.7%; the ratio of debt to GDP increased from 228.4% from 242.4%. In 2015, this ratio has risen up to 286%. The above sets of data have demonstrated, the global economic growth is achieved on the basis of massive debt expansion. They are a solid proof that Western credit ratings have failed to channel global credit resources into economies with real wealth creation capacity and opportunities, causing the imbalance between credit resource occupation and wealth creation capacity, and finally, becoming an instrument of disguising credit risks and a destructive force to global economic remediation and governance.

How could we incorporate equitable credit ratings into the global economic governance system? The key is to: 1) apply the research methodology which is able to reveal the inherent laws of the credit-based economy, and focused on the 2 pairs of contradictions in a unity of opposites, i.e., production and credit, credit and credit rating; 2) review the accomplishments and failures of global economic governance and draw lessons learned; 3) correctly recognize the flaws and harms of Western credit ratings; 4) formulate new ways of thinking about global economic governance, and 5) answer the fundamental questions concerning what to govern and remediate, how to perform the governance, and how to accomplish the remediation. The ultimate goal for the global economic governance is to establish and leverage an equitable credit rating system, allocate credit resources in an equitable manner, encourage and motivate wealth creation, achieve balance between debt scale and wealth creation. In order to prevent the imbalance of this important relationship from occurring and affecting the global economy, it is necessary to manage credit relationships effectively between debtors and creditors, a task in which an equitable credit rating system and process is critical and indispensable.

Mr. Guan also stated that the key to distinguish correct and wrong ratings is calculation, as credit rating is a form of calculation. It is calculating the amount of available and potential resources and capacity for the repayment of debt. Since the capability of debt repayment is dependent upon wealth creation capacity, the standard of credit rating will dictate that anticipated debt repayment resources should align with wealth-creation capacity; the bigger the deviation between the two, the larger the risk. Using this methodology, we can differentiate equitable and correct ratings from inequitable and wrong ones. Once we have transformed our way of thinking regarding how the global economy should be governed with the direction provided by the inherent laws of the credit-based economy, we will be able to establish a conceptual foundation to build up and incorporate an equitable credit rating system into the governance system of the global economy, and we will be able to focus our energy to construct a brand new international credit rating system which represents the broadest common interests of humanity and is capable of taking on the mandate to provide fair and responsible credit rating services for the world.

Consensus was reached after discussions at the Forum:

First, credit relationships between debtors and creditors provide liquidity for reproduction in modern society. A healthy credit relationship is critical to the performance of the global economy. Specifically, credit ratings influence the global economy by combining credit relationships, guiding capital flow, distributing credit resources, and forming credit consumption capacity. The credit rating plays a decisive role in influencing the development of the global economy.

Second, the ‘Belt and Road’ has become a new concept of world development for our society. Interconnectivity is the cornerstone to realizing this initiative. Cross-border capital flow is the fundamental premise in promoting it; indeed, it will determine its success or failure. However, traditional models cannot realize capital interconnectivity in ‘Belt and Road’ economies. Thus, an innovative model is urgently needed through reforms of credit rating system, and a new financing tool is essential to fully circulate the capitals in ‘Belt and Road’ economies.

Third, the burst of the second global credit crisis is inevitable. In 2015, the gap between global debt and global wealth creation capability continued to widen. The ratio of global debt to global GDP rose from 2.7 to 3.0. In the United States, with the Federal Government’s debt ballooning, the ratio of the country’s total debt to its GDP rose to 2.7; in Eurozone, this figure climbed to 3.6. Heavy debt burdens have become a drag on global economic growth, which led us into an era characterized by heavy debt, high risk and low growth. The debt risk of heavily indebted developed nations may break out in new weak links, and the time and form of the breakout are determined by the imbalance degree of the global economic development.

Fourth, the credit-based social system in China is significant for the world. Mr. Dominique de Villepin, Chairman of the UCRG International Advisory Council and former Prime Minister of France, emphasized that the establishment of a credit-based social system, as promoted by the Chinese government, is an innovative and historic model of national governance. It will serve as the flagship for similar systems in Asia, especially One-Belt, One-Road countries, and continue to influence the global economic governance system fundamentally.

This forum has attracted widespread attention from the international community, including Mr. Alejandro Toledo, former President of Peru, Mr. Shaukat Aziz, former Prime Minister of Pakistan and Mr. Igor Ivanov, former Minister of Foreign Affairs of the Russian Federation, as well as more than 400 delegates from 30 embassies, the economic sector, domestic and international financial institutions, securities corporations,N multilateral banks and media.