Commentary: Domination of U.S. credit rating agencies should be called into question

The "big three" U.S. credit rating agencies have again played a significant yet dubious role with their rating actions affecting some of the developing economies.

The arbitrary criteria of the big U.S. rating agencies such as Moody's, Standard & Poor's and Fitch, and their domination of an important function of the international financial system should be called into question.

Their sovereign credit rating decisions are supposed to be based on the underlying economic fundamentals, especially fiscal health and economic outlook. In reality, however, the criteria are often dubious.

Over the weekend, Moody's Investors Service downgraded its rating outlook for Hong Kong, a special administrative region of China, to negative, citing risks which it says are related to closer "political, economic and financial linkages" with the Chinese mainland.

Whereas such linkages are cited by the agency as source of risks, they are also often seen as factors that mean a lot of opportunities.

More importantly, the downgrade is not warranted by the fundamentals of the Hong Kong economy as there has been no material change. The economy is very healthy, with healthy fiscal position and sound financial regulation.

Early this month, Moody's cut the sovereign credit rating outlook for China to Aa3, citing what it sees as weakening of fiscal metrics, fall in reserve buffers and uncertainty about capacity to implement reforms.

However, a closer look would have led to a different conclusion. While it is true that government debt has risen, it is still far below the internationally recognized safety line of 60 percent of the gross domestic product. It is still a change within the comfortable zone.

The same holds true on China's fiscal deficit, which is projected to be only 3 percent of the country's GDP even if it represents a slight rise from the previous 2.3 percent. China's foreign exchange reserves are still a strong safety net despite a fall.

In other words, the rating change is not based on the fundamentals. Actually the rating action seems to be influenced more by short-term market sentiments, which have turned especially volatile in a world flooded with excessive liquidity. Experts have pointed out that the market volatility is not warranted by the economic fundamentals.

The criteria adopted by the big U.S. rating agencies seem to be all the more arbitrary if the credit rating of China is compared with that of some economies in the West. The sovereign credit rating of China is consistently less favorable than comparable Western economies. The disparity often arises as a result of different development paths.

Another problem with the big rating agencies is their domination. Rating agencies play a key role in financial markets by providing players with a gauge of credit worthiness, which is a basis for asset pricing. The big rating agencies of the United States wield formidable power, so much so that their credit rating can often be self-fulfilling. Concerns on emerging economies like Russia and South Africa have recently been exacerbated as a result of their rating actions.

With the rise of the emerging economies, the world economy is increasingly diverse. The problem of the big U.S. rating agencies lies with their dubious rating criteria and their domination of an important international function. The world needs a more diverse, balanced and objective credit rating system that reflects the changes and respects the fundamentals of the diverse economies. Endi