By Hao Li (International Business Times)

Criticism For Western Agencies

Dagong does not conceal its ambition to compete with Western ratings agencies and is not shy about criticizing them.

"The ongoing financial crisis which originated from the U.S. and the latest Greek debt crisis, have fully [revealed] the shortcomings and defects of existing sovereign credit rating agencies. In this context, the international community has reached consensus to reform the existing international credit rating system," Beijing-based Dagong said in a press release.

CEO Guan Jianzhong added that "intrinsically, the reason of the global financial crisis and debt crisis in Europe is that the current international credit rating system does not correctly reveal the debtor's repayment ability and provide the wrong credit rating information to the world."

Furthermore, Dagong pointed out that "the three [Western] rating agencies do not have much differences in their ratings...However, Dagong's ratings are quite different from theirs."

Indeed, while Moody's, Fitch, and S&P eventually move in tandem the vast majority of times, Dagong gave 27 countries out of the 50 a markedly different rating than Western agencies.

Ratings Philosophy

Dagong said that its core belief is that "it is the newly-created social wealth that supports the national funding capacity and constitutes the primary source of debt repayment."

Thus, its rather unique focus -- which differentiates it from Western rating agencies -- is their emphasis on fiscal revenues and not financing income. In other words, a country that relies on borrowing money to cover its debt obligations is less stable than a country that uses tax revenues to repay its debt, even if the former country can borrow with relative ease and certainty.

"Dagong emphasizes... the country's capability to pay its debt," the firm said.

Damon Vickers, managing director at Nine Points Capital Partners, agrees with this concept, remarking that many Western countries are functionally insolvent. He believes that Western credit ratings agencies, by assigning them the highest ratings, are acting as 'enablers' and covering up the reality of functional insolvency, and thereby hampering the process of admitting this problem and working towards a solution.

Vickers added that he is not even convinced that Western countries are successfully paying their debt by borrowing. Instead, he said they are also to some extent inflating their way out of debt.

Professionals Weigh In

"I think it's a good idea for other ratings agencies to develop, especially given the poor performance of S&P, Moody's and Fitch," said Kim Rupert, managing director of global fixed income analysis at Action Economics.

However, she remarked that Dagong's methodology needs to be more fully scrutinized before it can become more accepted by the financial community. In addition, Rupert said that generally speaking, the West is somewhat suspicious of reports and data that come from China.

Even though Dagong is reportedly a private ratings agency, it may be influenced by the Chinese government. Indeed, the prominent mention of remarks by Chinese President Hu Jintao in their press release adds to doubts over their independence in the eyes of some Westerners.

However, Rupert remarked that there is also a perception that Western ratings agencies have questionable relationships with the entities they are suppose to rate without bias, and that their poor performance certainly opens the door for new competition.

Michael Pento, chief economist at Delta Global Advisors in Parsippany, N.J., said that Western agencies "have a very bad history."

In the past, they have given collateralized debt obligations (CDOs), Enron, and Greece AAA ratings and downgraded them only when the deterioration in conditions became blatantly obvious.  "[Western] credit agencies have been notoriously way late to the ballgame," said Pento.

Rupert added that it is slightly suspicious that Dagong rated China noticeably higher than Western agencies do. However, Pento countered that it did not assign China the highest rating, and that assigning only a AA to the U.S. jeopardizes China's vast holding of U.S. Treasuries, so it may actually be against the Chinese government's interest to do so. Based on this, he theorizes that Dagong may be an honest and independent agency.

As far as the credit ratings themselves, Pento said he personally thinks they are more accurate than the ones of Western agencies. He remarked that countries rated AAA by Dagong deserve it because of factors like low debt-to-GDP ratios and strong global demand for their goods.

The following are top-rated countries by Dagong:

AAA : Norway, Australia, Denmark, Luxembourg, Switzerland, Singapore, New Zealand

AA+ : China, Canada, the Netherlands, Germany

AA: United States and Saudi Arabia

AA- : France, the United Kingdom, Korea and Japan

Ratings for some countries recently making headlines for their debt troubles include A for Spain, A- for Portugal, BB for Greece and Iceland, and BBB for Hungary.