Reinvestigation: Why do major U.S. ratings agencies manipulate Global South's sovereign credit ratings?

BEIJING, May 1 (Xinhua) -- Credit ratings agency Fitch recently downgraded the outlooks on China's sovereign credit rating along with those of six major state-owned banks, drawing criticism from economic analysts who deem it unfair and unjust. They argue that such actions fail to accurately reflect China's economic growth prospects.

Analysts believe Fitch's downgrading is an overestimation of the risks China faces and an under-estimation of its growth potential. In the realm of economics, confidence is more precious than gold. And the recent decision by Fitch Ratings appears to be a deliberate attempt to undermine that confidence.

So why would Fitch, a world-renowned international rating agency, come to such a conclusion? Is it possible that Fitch and other U.S. international rating agencies have become "political tools" of the United States to maintain its global hegemony and suppress the development of other developing economies?

MISJUDGMENT OF CHINESE ECONOMY

In the report, Fitch alleges that the Chinese government's debt risk is high, but the data do not support this conclusion.

Data from the Center for National Balance Sheet of the Chinese Academy of Social Sciences show that the debt ratio of the Chinese government sector was 55.9 percent by the end of last year, while data from the Bank for International Settlements show that the government debt ratio of G20 countries averages around 94 percent. In other words, the Chinese government debt ratio is at a low to medium level internationally.

However, Fitch's forecast for China's economic growth rate in 2024 is significantly lower than that of other agencies, making people question the reliability of its sovereign credit rating results.

Dagong Global Credit Rating Co., Ltd. said that international rating agencies have a comparatively limited understanding of China's national conditions and policies, making it difficult for them to accurately recognize the comprehensiveness, scientific aspects and reasonableness of China's macro-policies. In addition, their credit rating methodology is not applicable to developing economies, thus the rating can't reflect the real situation of China's sovereign credit.

Marcos Cordeiro Pires, a professor at Brazil's Sao Paulo State University, said that the downgrade of China's sovereign credit rating is an attempt to shake the market's confidence in the Chinese economy.

China's Ministry of Finance said that the index system of Fitch's sovereign credit rating methodology fails to effectively and accurately reflect the positive effect of fiscal policy in promoting economic growth.

"In the long run, maintaining a moderate deficit and making good use of precious debt funds will help expand domestic demand, support economic growth, and ultimately help maintain good sovereign credit," the ministry said.

FAILURE ON DEFAULT RISK DETECTION

Currently, the global credit rating industry is highly concentrated, with Moody's, Standard &Poor's and Fitch almost completely controlling the global ratings market.

In the process of the United States establishing global hegemony, the "Big Three" U.S. ratings agencies have gradually obtained a "rating hegemony" and set a "ceiling" for their objects' ability to raise funds according to their preferences.

When evaluating sovereign credit ratings, the "Big Three" often start from ideology and self-interest, denying the characteristics and advantages of other political and economic systems, as they are a tool for promoting the ideology and political stance of the United States.

Furthermore, the close relationship between the agencies and the capital market makes it hard for them to objectively and scientifically evaluate credit risks, and in some cases, their misjudgments have even sparked crises.

After some research, economist Carmen Reinhardt from Harvard Kennedy School concluded that "Contrary to logic, recent anecdotal evidence suggests that downgrades in credit ratings have not preceded financial crises. Downgrades appear to have followed, not preceded, the crises in Asia in 1997... Ratings would not have predicted the nearly certain defaults that would have occurred in several recent crises had the international community not provided large-scale bailouts."

For example, at the beginning of the 1997 Asian financial crisis, the three major rating agencies failed to detect the severity of the crises surrounding the Thai baht and South Korean won. As the crisis spread, they abruptly downgraded the ratings of some Southeast Asian countries, exacerbating the crisis.

In the years prior to the subprime mortgage crisis of the United States in 2007, the Big Three had overrated many junk bonds during the economic boom, leading to an increasing proportion of high-risk subprime mortgages. When the crisis broke out, they were too slow to downgrade the relevant companies, leading the market to underestimate the risks.

DOUBLE STANDARD ON GLOBAL SOUTH

According to Germany's Africa Policy Research Institute, in recent years, sovereign credit ratings of the Big Three for African countries have been "more frequent, unsolicited and deteriorating." As a result of low ratings, African governments are forced to pay more interest on their debt, leading to tight macroeconomic policies which are detrimental to the countries' long-term investment and economic growth.

African countries are not the only ones to suffer. In the past decade, developing economies and emerging markets have been actively participating in the Belt and Road cooperation, while the international credit rating system dominated by the Big Three has long been treating them with a double standard, for example, by rating the international financing products issued by Chinese leading enterprises at the "junk" level.

In essence, the current rating system was set up by the United States and other developed economies in favor of their own. By giving themselves high credit ratings and depressing those of the developing economies, they plunder the interests of the emerging markets.

The maneuver had a direct impact on the financing cost for developing economies such as China and its enterprises in the international market, and also raised barrier to deter the economic take-off of the Global South.

The result is obvious: All too often, Western enterprises can obtain a large amount of capital with little cost in the financial market, while the Global South enterprises have to pay a lot of interest and financing cost to get the same, all thanks to this unfair and unreasonable rating system.