A credit rating service with a difference

Q&A | Guan Jianzhong

Guan Jianzhong, CEO of Dagong Global Credit Rating Co, says he had a passion for high theories when he was young. Since the 2008 global financial crisis he has, apart from managing his company with 700-strong staff, spent most of his time studying how the prevalent credit rating practices were partly to blame for the crisis and looking for alternatives. On the sidelines of the June 29-30 World Credit Rating Forum in Beijing, Guan answered questions raised by China Daily's senior writer Ed Zhang about what Guan called innovative general methodology in credit rating and the basic ideas behind it.

Q: How is Dagong different from the world's other credit rating services?

A: Our main difference comes from the very fundamental theory of our credit rating operations. For most other credit rating companies, the key elements are default and the probability of default. But as I see it, a study of a debtor's past record of credit doesn't necessarily explain his or her future risk of default. If it's a company, the rating that you get is far from the whole picture, and you still don't know how sound its business is and if it is going through some important changes now.

The methodology in their calculation of default rate tends to also contain factors that don't have direct relations with a company's debt service capability.

Q: But if default and default rate are taken away from the consideration, what else can be used to measure a debtor's credit-worthiness?

A: My focus is not on taking away that concept or on finding the extent to which its weight should be reduced. My focus is on an alternative, or rather the financial source of the debtor to pay back the debt. Debt is not a problem so long as a debtor is secured with adequate sources of debt service or repayment. The source of repayment reflects the debtor's wealth-generating capability. The stronger a debtor's wealth-generating capability, the higher rating level it deserves.

Q: Then how do you measure a debtor's source of repayment?

A: In our system, there can be seven sources of repayment. They range - top to bottom - from upfront profit, operational cash flow, receivables, tradable assets, external financing and support, and foreign currency earnings to a sovereign entity's currency issuing capability.

Or, more generally, there are three broad conceptual types. They are the real upfront wealth, future wealth, and virtue wealth. In evaluating each individual case, we measure these factors and look at the shape of their structure.

Q: Are there other features in your way of credit rating?

A: We also consider the size of the market, or in the case of a company, the demand it is to serve, against its ability to actually satisfy the demand.

Q: Can you say your way is more useful than the old way of credit rating? Why?

A: I believe I can say so. First, our theory is more management-focused, and all the risk factors are more systematically taken into consideration in our rating practice.

Second, we are responsible for the creditors because we are more straightforward in identifying for them their likely source of concern.

Third, our method can be used to rate companies that don't have a very long history, even public infrastructure projects that are about to start and don't have a credit history at all.

The last point is very important, I think, for Chinese companies to take part in developmental projects overseas, in what the Chinese government calls "new Silk Road initiatives". They have to avoid projects that are environmentally unsound and, as a result, carry too much financial risk for them to bear.

Contact the writer at edzhang@chinadaily.com.cn.