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Preface

Time:2009-06-28 Source:dagong Editor: Print Font Size: Big Normal Small

The credit rating industry in China is in a critical intersection at the time that Dagong Global Credit Rating Co., Ltd. (hereinafter referred to as "Dagong") issued credit rating methodologies for those industries.  On the one hand, China's credit rating industry embraces unprecedented opportunities as various new debt instruments constantly emerge in China since 2005, and demands for raising capital from the debt instruments have largely increased.  Because of its short development history, however, there is a big gap between China's credit rating agencies and their international counterparts in terms of brand influence and R&D capability, and it hasn't established clear and operable credit rating standards specific to China's unique political and economic environment and development condition.  The credit rating business therefore has to be conducted in line with the credit rating standards established by international credit rating agencies, which makes it impossible to completely reflect the particularities of Chinese enterprises' risks source and other influencing factors based on such credit rating methodologies and standards.  More importantly, bargaining power on rating standards therefore is possessed by international credit rating agencies. On the other hand, as some major international credit rating agencies played a pushing role in the global financial crisis and recession triggered by the sub-prime crisis, which put the global credit rating industry under unprecedented trust crisis, establishing credit rating regulatory system and credit rating standards, improving transparency in credit rating procedures and rebuilding credit rating credibility has become the consensus for regulatory authorities worldwide.  Under such circumstances, it is also the mission for Chinese regulatory entities and credit rating agencies to make research on industry credit rating methodologies and establish consistent credit rating standards immediately.

Studying credit rating methodologies and setting up credit rating standards will encounter special issues in China.  Since the startup in 1994, the socialist market system has been established on the whole with more than a decade's effort.  The socialist market system, however, is still in economy transformation stage in general with considerable particularities in political and economic systems, economic development, and capital market development, which determines that in addition to the same risk sources as other countries and districts, Chinese enterprises also have their special risk sources.

As the pioneer in Chinese credit rating market, Dagong has been engaged in the study on credit risk particularities in different countries, industries, and regions, and the research on credit rating methodologies and standards accordingly.  Dagong gathers a number of senior analysts and postdoctoral researchers to conduct in-depth comparisons and studies on both domestic and overseas credit rating theories.  It also constantly summarizes experiences from plenty of tasks that Dagong involved in for years, including domestic debt instrument innovative designs and promotion applications, and credit ratings on corporate bonds, financial bonds, and structured financing bonds.  By learning from such experiences, it will continue to study, update, and improve industry rating methodologies.  Dagong initiated the issuance of a set of industry credit rating methodologies in 2000, and this time, it issued the latest rating methodologies, highlighting particular risks in various industries at present and in the future. With the continuous studies in this field, Dagong will update and successively introduce more industry rating methodologies.

The industry credit rating methodologies Dagong introduces this time include a general introduction of the overall credit rating methodologies and specific credit rating methodologies for ten industries.  The general introduction elaborates the connotation and the principle to establish industry rating methodologies, technology foundation, and general analytical framework for credit ratings.  Each specific industry credit rating methodology is an application of industry rating theory, including summaries on operating characteristics in each industry and analysis on their impacts on industry-wide credit risks together with enterprises' credit ratings.  Subsequently, Dagong summarizes all factors to be considered based on the analytical framework, when determining credit ratings on the enterprises in the industry.  Moreover, Dagong discusses about the impacting mechanism and how the factors influence the credit risks of each enterprise, as well as measure optional indexes of every rating factor and the reference mapping data of partial indexes.

The credit rating methodologies issued this time cover ten industries, including power, coal, iron & steel, urban investment, construction, port, papermaking, cement, fertilizer, and copper. Dagong chooses these industries because debt instruments are mostly issued in these industries and they are also of considerable significance, for instance:  I) Power, coal, iron & steel as well as copper industries are important energy industries or fundamental material industries in China.  II) As the financing platform for local governments, urban investment typically represents public utilities and also fully reflects financing characteristics of Chinese local governments.  III) Construction industry is an infrastructure building industry and cement, as the primary construction materials, is closely related to construction industry. IV) Ports are important transportation infrastructure while papermaking is a typical light industry in China; and v) fertilizer industry is crucial for agriculture.

 

The Academic Committee of Dagong Global Credit Rating Co., Ltd.
Compiling Committee of Dagong's Credit Rating Methodologies
May 2009

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