The Rise of Dagong Global Credit Rating Agency and the International Credit Rating Agencies Reforms

Regulators from the US, the EU and China embarked on a series of comprehensive reforms to regulate the business operation and governance of the credit rating industry in response to the Global Financial Crisis 2007-08. Dagong Global Credit Rating Co (Dagong), a Chinese national representative Credit Rating Agency, heavily criticised the international Credit Rating Agencies’ rating methodologies and their involvement in the Crisis, although it faced backlashes in the US, the EU and in its homeland because of acute conflicts of interest and its geo-political bias. This thesis focuses on three main areas of evaluation. First, it provides an in-depth comparative evaluation on the current regulatory reforms in the US, the EU and China and the effectiveness of these legal frameworks in dealing with the challenges facing the rating industry. Secondly, it analyses Dagong’s claim for revolutionising the existing international rating methodologies and bringing the theory of the wealth-generating ability of issuers to reduce pro-cyclicality. Thirdly, it evaluates the geopolitical bias of Dagong’s ratings and whether Dagong can be an alternative to the international big Credit Rating Agencies.The main findings are as follows: (I) the current legal framework improved the credit rating industry’s performance and business operation significantly, although further reforms are needed to prevent future financial crises. (II) Dagong’s rating methodologies and models do not deviate from the mainstream Credit Rating Agencies. Nonetheless, the principle of non-deviation from the debtor’s wealth-creation ability and the method of pre-determination of the issuer’s ratings adopted by Dagong should offer some valid considerations to curb unbridled credit expansion and rating inflation. (III) Dagong cannot be a feasible alternative to challenging the dominance of the international big Credit Rating Agencies because of its geopolitical bias. Dagong’s new state-ownership can increase its local competitiveness; nonetheless, it will impede its credibility at the international level