SEC Denies China's Dagong of Market Entry After U.S. Debt Downgrade

Politics / GeoPolitics
Sep 26, 2010 - 07:00 PM

By: Dian_L_Chu

The U.S. Securities and Exchange Commission (SEC) on Thursday denied the application by China's largest credit rating firm--Dagone Global Credit Rating Co.--to become a Nationally Recognized Statistical Rating Organization (NRSRO) in the U.S. http://www.bloomberg.com/news/2010-09-2 ... tatus.html

The SEC cited concern regarding cross boarder supervision since “It does not appear possible at this time for Dagong to comply with the record keeping, production, and examination requirements of the federal securities laws."

Media report quoted an SEC official that Dagong is the first firm to be denied by the SEC since the regulations governing the application process went into effect in 2007.

Dagong’s claim to fame came with its first international sovereign ratings report released in July of this year. In the report, Dagone stripped the U.S. the AAA rating, while giving emerging economies like Brazil and China higher credit ratings than the US , the UK, and Japan. Those ratings widely contradict the ones assigned by the Big Three – Moody’s, Standard & Poor's, and Fitch.

Dagong, then followed up with some sharp criticism of its western counterparts, and a verbal clash with Harold "Terry" McGraw III, whose company owns Standard & Poor’s credit agency.

So, it is of no surprise that Dagong immediately issued an angry rebuff calling the SEC’s decision discriminatory against China and a barrier specifically set for Dagong. It also took it a few octanes higher –citing China’s sovereignty and financial assets safety are at issue here. From People’s Daily Online: http://english.peopledaily.com.cn/90001 ... 50249.html

“….the contention by U.S. authorities… amounts to bias against Chinese credit-rating agencies. Dagong will not accept the NRSRO status at the price of betraying national sovereignty….. Dagong will consider conducting activities at the right time to protect its rights, including seeking legal actions against the SEC."

China Daily also cited Dagong statement that having China's own say in credit rating in the United States is significant to safeguarding the security of China's overseas financial assets. And Dagong aims to enter the U.S. market to protect China's interests as the largest creditor there. As of July, China held $846.7 billion worth of U.S. Treasurys, according to official U.S. data. http://www.chinadaily.com.cn/bizchina/2 ... 347944.htm

Although Dagong’s ownership structure is not public information, the company works closely, and undoubtedly has a significant linkage to the Chinese government. So we can pretty much take whatever coming out of Dagong as “quasi-official,â€