Did we just export the global credit rating industry to China as well?

What happens when sovereign wealth funds have little or no transparency, or when companies can cheat rating agencies, or when various financial vehicles earn the proverbial “Triple-A” rating and seal of approval? Well, I’ll tell you what happens; Freddie and Fannie, Enron, Lehman Brothers, Bernie Madoff, Dubai and all the other financial catastrophes of the past. Irrational Exuberance always has its cheerleaders until the music stops and there aren’t enough chairs left for everyone else. Yes, we live in turbulent times, and I would also say “Interesting times”, to borrow a famous old Chinese quote. .

There was a disturbing piece on Bloomberg recently, which was titled; “China May Establish Credit Rating Firms” which appeared on Dec 24, 2011. The article reported on a simple announcement made by the Chinese government, nothing too alarming on the surface, but it bothers me a lot, let me explain. The article said;

“China should reduce its reliance on foreign rating firms by encouraging large financial institutions to strengthen their research and make their own judgments,” the central bank said. The nation is also considering setting up government-backed credit rating firms. China wants to seek alternatives to the top 3 global ratings companies amid skepticism among officials about the companies’ independence. China established its first rating company that makes investors pay instead of borrowers, called China Credit Rating Co. last year.”

Well, then, you ask, why would I care about this? Well let me explain. You see, in mid-2011, S&P downgraded US Treasuries, and did so right at a time, oddly enough and with a lot of plausible deniability, when China was in a global media spat. over currency manipulation charges and while China was grappling with major downgrades of real estate companies, Chinese banks and allegations of corporate accounting improprieties.

At that time, also the Chinese credit rating agency, which is linked to the Chinese government and the central bank, also downgraded the debt rating of the US credit rating agencies. Today, it seems that China wants to control the conversation about its fiscal responsibility, change the reality of financial stability, and present its version of the truth, as they see fit. It makes sense, after all, China also enjoys controlling the media, micro bloggers, and the Internet with heavy fines, penalties, and imprisonment for those who question its authority.

Should this latest move surprise us? No, I am not, but I am concerned about the financial integrity of China’s real estate market, financial sector, and reliance on exports as the global economy, at the moment, mainly due to the EU crisis, slows down.