Articles & Speeches

The Founding of UCRG Represents an Historic Watershed for Humanity: The Establishment of a New Global System for Rating Credit Address to the World Islamic Banking Conference

May 18, 2015 05:08 PM Author dagong Font:TTT

Guan Jianzhong  

The global credit crisis that erupted in 2008 was a baptismal experience for the world and there is now a more correct understanding of credit-based economics.  For the first time, credit and its role in the global economy has become a theme of everyday discussion and its elements part of common language. People from all walks of life – not just financial experts and professors – have begun to grasp the significance of credit and its role in the orderly development of economic activity.  

The esteem in which the western rating agencies were held also began to crumble.  Reformation of the existing system and the creation of an entirely new order of rating credit has captured the imagination of many, not just those in finance and economics.  From the ashes of crisis came a significant ideological shift in thinking which coalesced into the birth of a child; a child of the future; a child which will grow to represent the entire international community.  and this child’s name is Universal Credit Rating Group, or UCRG.

UCRG was launched internationally on the 25thJune, 2013, with the ambitious goal of constructing a new international credit rating system.

1. UCRG is the theoretical choice for humanity to construct a new international rating system

UCRG is the product of the times through which we’re now living. Concomitantly, it crystallizes our theoretical perception of the laws governing the development of a credit-based economy that serves all of humanity, not just a privileged few.

The end of World War II marked the close of an era, before which credit was based on actual material wealth or capital goods. Since that time, consumption has continuously expanded via easy. But this expansion of credit then outpaced our ability to produce and has as a result become disengaged from the natural capital formation process. This has had a major negative impact on the world’s social and economic development.  

Rapid social change has resulted in two pairs of contradictions. These are production vs. credit, and credit vs. rating.  

The essence of the first pair of contradictions is that the requirements of production on consumption is satisfied through continuous expansion of credit, thus making them the driving force of economic pro-cyclicality.  My point is the examination of credit worthiness within the context of economic cycles, as opposed to being in contrary motion with them was a fundamental basis for the crisis we’re living through.

The second pair of contradictions is that credit expansion beyond a debtor’s ability to repay–on time and in full–has unbalanced the stability of healthy credit relationships, which should be the driving force of economic counter-cyclicality.  The process of credit ratings as an indispensable medium for creditors and debtors to establish a healthy relationship assumes very significant responsibilities for those who provide them.  This innovative thesis gives us a new theoretical foundation that will help us avoid further crises and also help us to construct an entirely new international rating system.

The key elements of this thesis are as follows:

1) Credit ratings are guardians of the safe development of humanities economic affairs.  As such, they must embody the common interests of all;

2) The existing international system represents only the interests of a minority, and at the same time, this minority happens to be some of world’s largest debtors. The existing system has been promoting credit expansion and actually propagating the likelihood of economic crisis.  The inescapable conclusion then is that the old system is not capable of bearing the responsibilities inherent in global credit ratings.

3) The international credit crisis resulted from the fact that credit rating failed to perform its role as a counter-cyclical driver.  This is contrary to the laws which govern a credit-based economy and its safe development.  But fundamental reform is impossible within an outworn system the application of which is contrary to the natural laws that govern a credit-based economy.  

Only by creating a new system can credit ratings be the essential guardian of an ever advancing and prosperous global civilization.

2. UCRG is the right path for human society to create a new international rating system

Creating a new international order in credit rating is now become the common pursuit of the entire international community, and the approach to realize this mission should meet the fundamental requirements of the laws governing a credit-based society:

1). an international credit rating system must assume tremendous responsibilities for a world in which credit relations are the basic requirement of globalization.  Therefore, objectively, there is the need for a rating carrier that can represent the common interests of the entire planet.

2). cross-border capital flows have become a new driving force in the economy. There is therefore an exigent need for an international rating service system to participate in the rating business of each nation.

3). Impartiality, consistency, comparability and mobility of credit rating information are obvious preconditions to enable cross-border capital flows.  Therefore, again objectively speaking, there is the need for truly international rating criteria. 

The nature, mission, goal and practical task of UCRG satisfies this historic need.

1. The nature of UCRG – its basic structure - is one of a non-sovereign owned credit rating agency that does not represent the interest of any country or any political or economic group.  Its potential for extensive representation is clearly demonstrated by its unique shareholding structure.  It’s a structure that allows every country in the world to participate in UCRG as equal partners, giving it the ability to represent the whole of humanity.

2. The mission of UCRG is to promote the reform of the international credit system, to create a new international rating system that can assume the responsibilities I have just described.  

3. The goal of UCRG is to build the basic framework of a new international rating system and the basis of a new order in international ratings within ten years.

4. URCG’s most immediate task is to create a new theoretical system for rating credit, involving new methodologies and technologies, within the next five years. This will allow UCRG to provide the world with an overarching credit information service.

The birth of UCRG is the result of five years’ study and an exploration into the root causes of the crisis.  We have now solved the problem with a clear roadmap of how to establish a new international rating system.

3. UCRG is the right model for humanity to reform the international rating system

How can we achieve the successful reform of the international rating system? The world has made great strides in the exploration of this most challenging issue. Ultimately, the conclusion, the fruit of collective wisdom, has come to this conclusion: through establishing a new international rating system, creating a new landscape in global credit rating, with the coexistence of both the old and new systems, therefore providing the market with an alternative.

UCRG believes that this dual rating system is the best way forward: coexistence of the old and the new, with substantial differences between each.

This is UCRG’s model of Dual Ratings.

The old system is the existing international rating system with sovereign-owned characteristics dominated by the three US-based credit rating agencies.

History has proven that the nature and mission of this system is to serve the interests of US-issued sovereign bonds and it will never change its rating position no matter how much the rest of the world either protests or posits new ideas to fix it. Competition in rating grades and the convergence of rating technologies resulting from a lack of competition; double standards due to biased ratings and erroneous ratings because of a protectionist rating philosophy have made the existing international rating system a vehicle to propagate sovereign interests and destroy global economic development.

UCRG’s answer is a new non-sovereign-owned international rating system that is empowered by the participation of every nation on the planet, its ultimate goal being the provision of independent credit rating information to the whole world.

It is the guardian of the general interests of humanity.

The old system is monopolistic and domineering. and so far there exists no means to effectively highlight the risks in its rating technology because of the lack of any mechanisms for self-correction.  

Following the introduction of UCRG’s new system there will be the opportunity to compare and contrast and competition between the rating technologies of the two systems will be blindingly obvious.

In fact, the global market will actually benefit from the options of rating information provided by the two systems. At the same time, UCRG will have the strength and global authority to highlight risks inherent in the rating technology of the old cartel.

A dual rating model will not pose any threat to the survival and development of existing credit rating agencies. Dual ratings is simply an outcome of the existing regime, rather than the result of competition with existing credit rating agencies.

In other words, while keeping the current rating provided by a sovereign-owned credit rating agency, another rating provided by the non-sovereign-owned credit rating agency will be added to the same rated entity.

Therefore, a debtor will be assigned two different ratings by two rating systems.

Such a dual rating has a completely different set of implications from the double or multiple ratings that are assigned under the present monopolistic system, which was the result of competition and characterized by the obvious assimilation of credit ratings; also the increased likelihood of concealing risks and providing false rating information.

The dual rating we advocate–again, two systems, old and new – countervails what we believe has been a deliberate arrangement to distort the market. Examined objectively, our system will avoid the faults of double ratings generated due to competition.

In particular, the non-sovereign-owned rating system proposed by UCRG has its own rating technology system that demonstrates greater impartiality. Its information is more reliable thanks to the lack of interference by competition.

Ultimately, UCRG and its country-based partners is bound to prosper under the dual rating system we propose.

4. The dual rating regime will boost the development of the Sukuk market.

As one of the world’s most promising markets, the Sukuk market has tremendous potential for growth under a dual rating system:

The strategy for economic development of Islamic countries will require a vast bond market to provide liquidity. Currently, the stock of Sukuk market is $ 298.86 billion, or 4.75% of GDP in 2012. From 2000 to 2012, the nominal GDP growth of Islamic countries increased by nearly three times and the total amount of Sukuk issuance grew by 326 times. The aggregate national economy of Islamic countries is expected to exceed 1.7 times of that in 2012 over the next decade while the total amount of Sukuk to be issued will exceed 5.4 times of those issued in 2012.

The very favorable economic fundamentals in Islamic countries have laid a solid foundation for the steady growth of the Sukuk market. From 2000 to 2012, the nominal GDP of Islamic countries increased by nearly three times, compared with the 1.2 times of the global average and 72.2% of the developed countries. Islamic countries’ total trade and government revenues grew by 3.2 times and 4.7 times respectively, while the global average was only 1.8 times and 1.2 times and the developed countries saw a government revenue growth of 68.7%. Islamic countries’ government debts registered an increase of 1 time, while the global average was 1.7 times and for developed countries it was 1.6 times. The above figures indicate significant improvement of the overall solvency of Islamic countries.

1. Sukuks, embodying Sharia Law, can safeguard the security of the bond market, which constitutes a very positive factor for Sukuk market growth.

We have every reason to believe that the Sukuk market now has an historic opportunity for high growth and its rapid development is irresistible. We must also understand clearly that rating system reform in Islamic countries is bound to be the deciding factor for the historic growth of the Sukuk market.

Research on Islamic rating system reveals that the rating system led by local rating agencies has been playing a positive role in boosting Sukuk market development. But from an economic development perspective, the sovereign-owned monopolistic Islamic rating system resulting from market competition has the following disadvantages:

2. The market influence and authority of local Islamic rating agencies have not been fully established; thus their rating capabilities are unable to attract the widest range of fixed income investors.

3. Transnational exchange of rating information has not been realized among Islamic countries and thus it is difficult to connect with the international markets. This is not conducive to encouraging external capital flows into the Sukuk market.

There exists serious systemic risk in the rating model characterized by the competitive approach adopted in Islamic countries. This is a fact validated by the failure of the western rating system.

As we all know, the size of the bond market is determined by the quantity of transactions between creditors and debtors who are linked by credit ratings, while its market security depends on rating quality. Therefore, the growth of the entire Sukuk market needs to be realized by establishing an internationally influential rating system that is able to fairly reveal its debt risk. My suggestions are as follows:

(1)We need to understand the situation, reach consensus, and start to plan for the reform of the Islamic credit rating system aiming at establishing dual rating system;

(2)While developing local rating agencies, we should encourage relevant institutions of Islamic countries to join UCRG and acquire more say in international rating sector through its participation in global rating governance process;

(3)Islamic governments should encourage UCRG to establish offices in their countries and integrate UCRG into its national rating system. In this way, we can establish a link between the Sukuk market and international bond market to realize a new capital flow pattern with transnational flow of rating information as the carrier so that Sukuk market may become the earliest beneficiary and a new historical starting point of the reform of the international rating system.

(4)Cooperation with rating agencies of the creditor countries and capital-exporting countries need to be enhanced, so that more investors can be introduced into the Sukuk market through the natural connection between the credit rating agencies and investors in their host counties.

We should look at the growth prospects of the Sukuk market from a new global perspective, as well as the feasibility and urgency of rating system reform with a new way of thinking. With extraordinary international vision and courage, we also need to integrate Islamic rating system reform into the construction of a new international rating system.

By joining hands with UCRG, the influence of Islamic countries can be significantly bolstered worldwide; the Sukuk market simultaneously promoted internationally; and its growth accelerated throughout the Islamic world.

Thank you very much.