From Beijing To Milan, Dagong’s Challenge To “The Big Three” Credit Rating Agencies

Originally published in La Repubblica Affari e Finanza on 21 January 2013
The Chinese credit rating agency opens its first European office in Milan, kicking off its competition with Moody’s, S&P, and Fitch with new evaluation criteria, the “provision” to buy troubled companies, and a private equity fund amongst its investors.
Beijing – Everything is ready in Milan for the European debut of the Chinese credit rating agency Dagong, the first to break into the Anglo-Saxon monopoly of the Big Three: Moody’s, Standard & Poor’s, and Fitch. The Italian subsidiary of Dagong, staffed by 40 analysts, is preparing to carry out financial evaluations all over the Old Continent, where they are also planning more openings over the next few years, causing growing alarm in markets and governments over the debut of criteria and evaluations of debt that are different from those in the past, capable of being decisive factors for the prospects of companies and nations. The Milan office has even attracted the attention of intelligence agencies, which have been tasked with finding out what interests lie behind the agency that was the first to downgrade the USA and Italy, causing interest rates to rise.
The intelligence agencies are intrigued by the fact that Dagong, founded in 1994, has chosen Italy as a springboard to push its influence past the confines of Asia. The answer is Mandarin Capital, the first Sino-Italian private equity fund that for years has been amassing capital in Italy and China, to be invested in both countries. Dagong Europe Credit Rating Agency, with Lorenzo Stanca acting as vice president, is 60% controlled by its parent, while the other 40% is controlled by Mandarin Capital Partners, a group of important families of Italian capitalism. The attention on the Milan debut was attracted by several factors: its coinciding with the opening of Dagong in Hong Kong, planned for 2013, the opening of banking offices in Lombardy, the beginning of contract bidding for the Milan Expo, the emigration of corporations to the east, but most importantly the Eurozone crisis, which multiplies the number of companies up for sale at bargain basement prices.
China’s willingness to invest in Italy and the rest of Europe, not just with its sovereign fund, has been known for some time, as has the cautious waiting tactic adopted by Beijing to this day. The concern of European analysts and politicians with regards to Dagong Italy is that the instrument of sovereign rating, the spark that caused the debt crisis, could influence the value of assets placed on the market due to the hardships caused by the crisis. The anti-Chinese fear that Dagong, privately owned even in China, will take aim at Italy and Europe to lower the prices of corporations and infrastructure that have caught Beijing’s eye. Who instead has faith in Chinese growth, and believes in a financial climate that is not dominated by American influence, welcomes Dagong’s expansion into Europe as a balancing element, in addition to an enrichment of analysis in favour of institutions and investors.
Putting the US-Chinese competition for who has had most influence on this century aside, for which the rating remains a formidable weapon that has been denied to weaker states, a new diversity in evaluation criteria emerges. For the three traditional agencies, determining factors for a rating are political environment, monetary and fiscal flexibility, privatizations, and liberalization. For Dagong, who does nothing to hide its disdain for the political pressure exerted on “Made in USA” credit ratings, agencies should instead consider fiscal pressure, financial reserves, debt burden, prospects for growth and the creation of wealth, and the real health of accounts. Different political-economic models and interests, but converging conclusions: that is, that the world needs balanced multilateralism even in evaluations of sovereign debt, to counter the speculation on financial markets that are at the mercy of out of control interests.
It is understandable that the largest investor worldwide, who also happens to be the biggest creditor in both Euros and dollars, is safeguarding itself through a monitoring body that is close to its interests. But the challenge for Dagong does not end in Europe. To counter the overwhelming power of the American agencies, more than once forced to revise their evaluations in light of those made by the Chinese, Dagong has formed, along with the Russian agency RusRating and the American Egan-Jones Ratings, the Universal Credit Rating Group, with the goal of “reducing the economic risk for the development of human society.” The three partners maintain that they “do not represent the interests of any country or group” and they will “supply impartial information in the field of evaluations of international markets.” What remains to be seen is the real impact that Dagong will have on the global economy, and how long it will take the heirs of Mao Zedong to impose their own test on a capitalism worn out by the failure of finance as an end in and of itself. This is the US-Chinese vice that is squeezing Europe’s economic future: unable to overcome nationalistic opportunism to give life to a rating agency Made in the EU.