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Chinese Rating Agency Comes Under Fire

The Chinese rating agency best known for downgrading US sovereign debt last year, has come under fire domestically for giving the country’s embattled railway ministry a higher rating than the government.

A member of the security staff stands on the platform next CRH380A train, foreground, used on the Beijing-Shanghai high-speed line, at the Hongqiao Station in Shanghai, China.
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A member of the security staff stands on the platform next CRH380A train, foreground, used on the Beijing-Shanghai high-speed line, at the Hongqiao Station in Shanghai, China.

Critics hit out at Dagong Global Credit Rating after it reiterated its long-standing triple A rating on short-term financing paper issued by the railway ministry. That rating had garnered little attention previously, but over the past six months the railway ministry’s reputation has been tarnished by a widening corruption scandal, soaring debt levels and a high-speed rail collision that killed 40 people last month.

The central government, which would ultimately be on the hook for railway debts, is rated one notch lower by Dagong at double A-plus, an apparent inconsistency that Chinese media have been quick to pounce on.

Dagong was praised in China for its courage and foresight in twice downgrading the US sovereign rating before Standard & Poor’s became the first leading global rating agency to lower the US credit score this month.

Critical of the power of S&P, Moody’s and Fitch, China has pledged to develop homegrown alternatives, and Dagong is one of the country’s leading rating agencies.

But Dagong is now facing criticism and derision in China for its view of the railway ministry.

“Far from putting people at ease about the railway ministry, Dagong’s triple A rating has instead generated suspicions about its own credibility,” said the 21st Century Business Herald financial newspaper.

In a statement sent to Chinese media, Dagong said its ratings of the government and the railway ministry belonged to different classification systems and were not directly comparable.

Dagong said that government backing was one of the railway ministry’s strongest assets. “The state will continue to expand its investment in railway construction and this will inevitably increase the railway ministry’s creditworthiness,” it said.

Investors took a less optimistic view. The annual coupon rate on the 90-day paper issued by the ministry last week was 5.55 percent – 163 basis points higher than earlier this year.

Analysts noted that the ministry’s cash flow did not appear sufficient to cover its current interest costs, and debts have continued to climb on the back of China’s huge railway investment program. The ministry’s liabilities have tripled in three years to Rmb2,091 billion ($327 billion), or about 5 percent of gross domestic product.

In the wake of the July 23 bullet train crash, China has begun to rein in its high-speed rail plans, suspending approvals of new lines and lowering operating speeds.

Yet the government has reaffirmed its objective of building nearly 30,000 kilometres of new railway lines by 2015.

With many passengers avoiding bullet trains after the crash, the ministry has also decided to lower ticket prices on high-speed services, which some analysts warn could further erode its ability to repay debts. But Dagong said that higher passenger numbers would make up for any lost revenue and that lower speeds would reduce operating costs.

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