Articles & Speeches

Construction of the Asian Credit System and UCRG

May 18, 2015 05:19 PM Author dagong Font:TTT

Guan Jianzhong

At the 16th ASEAN-China (10+1) Summit on October 9th, 2013, Premier Li Keqiang of the State Council of PRC put forward a strategic objective of establishing an Asian Credit System, an ambitious forward-looking vision that conforms with the demands of our time and focuses on the future development of Asia. Towards this end, it is necessary for us to reach a consensus at an early date on the objective of the approach for the construction of an Asian Credit System.

The overall objective of creating an Asian Credit System is to achieve sufficient cross-border flow of Asian capital in the region by building an Asian Credit Rating System and Credit Information Service Platform in a bid to transform the Asian Credit System into a brand-new dynamo driving economic integration in Asia.

Forged by credit relationships, the Asian Credit System- as a regional capital flow system- is created to facilitate the transnational formation of creditor-and-debtor relationships. Consensus has been reached on the connectivity and integration of economic factors Asia-wide. That being said, the underlying driving force behind regional economic growth is the materialization of cross-border capital circulation. The prerequisite, in this context, is to shape a system for capital circulation within Asia. As a form of capital combination, credit relationships established between creditors and debtors are the only channel for the free circulation of capital. In other words, it is essential to shape an Asian Credit System and make credit relationships more pervasive in the region as a way to ensure that capital effectively flows across the borders of Asian economies. With this objective in place, consumption across Asia will be boosted, which will fuel regional economic growth.

The primary condition of forming transnational credit relationships is to build an Asian Credit Rating System in order to enable rating information to circulate across borders. Credit relationships are made pervasive based on creditors' judgments of debtors’ repayment capabilities. As for transnational credit relationships, creditors need the credit information on foreign debtors to make investment decisions. In particular, as we press ahead to formulate a capital flow system featuring debt chains within a region of multiple nations and empower capital to move around Asia, it is necessary in practice to quickly make credit relationships pervasive. To that end, it is critical to deliver consistent, comparable, and transferable information about debtors’ creditworthiness through an industrialized production approach. Against this backdrop, it becomes the practical option to found a new type of credit rating agency (CRA) that is able to shoulder the responsibility of assigning ratings to entities throughout Asia.

An Asia credit information service platform is a necessity for the transnational flow of credit rating information. Ratings are the results of debtor-related information and foreign debtors’ repayment risk analyses. In absence of supporting regional information service mechanisms and by mere reliance on data collected by CRAs, it is impossible to provide rating information in a prompt manner for creditors and debtors to establish transnational credit relationships; the quality of the rating information will be compromised. In this connection, it becomes a natural choice to create a credit information service system that backs up the integration of credit ratings assigned by Asian CRAs.   

The establishment of an Asian Credit System features three specific objectives: First, to build a regionally recognized credit rating system in a bid to materialize the connectivity and interworking of credit rating information. Second, to formulate an Asia credit information service platform in an effort to realize the connectivity and interworking of information related to credit relationships. Third, to establish an Asian Credit System with a vision of the connectivity and interworking of capital portfolios forged by credit relationships. Among the three targets, creating an Asian credit rating system plays an essential role as credit ratings-credit relationships-and credit systems represent the logic of objective existence. Only with consistent, comparable, and transferable credit rating information available can transnational credit relationships take shape, based upon which a region-wide credit system can be set up and start running. Ultimately, cross-border capital flow will be realized.

At the annual conference of Asian Development Bank on May 6th, 2000, in Chiang Mai, Thailand, Ministers of Finance from ASEAN 10+3 countries signed the Chiang Mai Initiative, taking the pursuit of an integrated rating system region-wide as the top objective of the Asian securities market. To make that happen, competent authorities from different countries have explored possible solutions. Three proposals have been put forward. First, striving for cross-border mutual recognition of rating results assigned by CRAs in different countries. Second, creating a regional CRA in Asia. Third, establishing a new type of international CRA based in Asia in the setting of credit globalization, facilitating capital circulation across Asia, and providing rating services for Asia-based capital to go global. More than a decade of exploration efforts have resulted in a historic decision.

It is impractical to attain the consistency, comparability, and transferability of rating information in Asia through mutual recognition of rating results among Asian countries. The logic behind this is as follows: the domestic political and economic environment of a country is the key objective credit risk factor for local debtors, while their own profitability the key subjective one. The afore-mentioned two categories of risk factors basically shape the particularity of what makes a country’s credit risks and determines the differences between the mechanisms of credit risk formation in different countries. Domestic CRAs adopt certain rating criteria that is only suitable for disclosing the credit risks of local debtors, and accordingly generate very different rating results. Such a great variety of rating opinions, which reflect the unique credit risk features of various countries, can by no means be mutually recognized quantitatively. Meanwhile, the cross-border mutual recognition of rating results will inevitably give debtors complete freedom to choose a CRA they prefer. Given the stance of debtors, the reliability of rating information will be adversely affected. Consequently, mutual recognition will evolve into cross-border transference of credit risks with severe repercussions. Therefore, the impractical proposal of championing mutual recognition of rating results between countries remains no more than a concept throughout.

What is also infeasible to strive for the consistency, comparability, and transferability of rating information in Asia is to establish a regional CRA. The logic behind this is as follows: while governments’ roles are limited to being mere facilitators in constructing a regional CRA, it is hard for domestic CRAs,major players in this endeavor, to consent to key issues regarding interest distribution and development goals, et cetera. Additionally, the idea of a regional CRA deviates from the historic trend where economic globalization demands consistent rating information that underpins international capital flow. Therefore, the first attempt has never been made to put this constructive idea into practice.

The global credit crisis has made the international community awaken to the fact that credit ratings have a stake in the sound development of society, that the Western-dominated global rating system is no longer capable of undertaking world rating responsibilities, and thus a new international rating system-representing the common interest of humanity-must be launched. Such awareness, reflecting the mainstream mindset of the modern era, actuated reforms in the global rating system.UCRG was founded in response.

Universal Credit Rating Group (UCRG) is a new type of multi-lateral international credit rating agency, co-sponsored by domestic CRAs from China, USA, and Russia. It aims to garner investments by representative agencies from every jurisdiction and embody the common interests of society. Its purpose is to promote the establishment of a new type international credit rating system to provide an alternative rating for pervasive credit relationships while the current international rating system, with its sovereign-owned characteristics, is running so that a new rating architecture, featuring the co-existence of the two rating systems and possessing openness, inclusiveness, and an inter-complementary and counter-balancing nature will be created.  This is the optimum option for society to reform the global credit rating system.

Emerging in the same era, UCRG and the Asian Credit System share a common development goal and serve as each other’s partner in coexistence.

UCRG does not represent the interest of any specific country or bloc; therefore, it can ensure rating impartiality. With uniform rating criterion, it makes sure that rating information is globally consistent, comparable, and transferable. Its positioning and values of ratings better reflect the demand of Asian economies in their status as creditors. Due to the aforementioned factors, UCRG is capable of undertaking rating responsibilities as an Asian Credit System takes shape. The construction of the Asian Credit System requires a rating information supplier that suits Asia’s need for credit ratings, as well as one that provides impartial ratings, upholds the interests of Asian creditors, and brings Asian capital to the world. In this light, the positioning of UCRG aligns closely with the needs of the Asian Credit System.

Originated and based in Asia, UCRG belongs to Asia, but its significance reaches beyond Asian boundaries. Taking the lead in cementing the dual-rating regime in Asia and serving the needs of the Asian Credit System marks the starting point of its march towards the wider world. Choosing UCRG as the rating supplier for the Asian Credit System brings interconnectivity to Asian capital and its integration into the global capital flow- it forges a pathway for Asia to go global.

UCRG, a supplier of credit information, has made a historic convergence with the Asian Credit System, a demander of such information, against the background of the world economic recovery. To follow the historic rule and to seek the link between the two will significantly accelerate the historic course of construction for the Asian Credit System.