By Wang Yanhang    Source: Global Times    Published: 2016-3-13

US rating agency Moody`s lowered China`s government bond rating from stable to negative earlier this month, and Tuesday it cast doubts over China`s ability to maintain reasonably high rates of GDP growth while also "reforming and rebalancing the economy, and ensuring financial and economic - and thereby social - stability." The agency took another step on Saturday by downgrading the Hong Kong Special Administrative Region`s rating outlook from stable to negative.

Many observers do not agree with the agency`s conclusions, and Moody`s moves have triggered criticism that the big credit rating agencies (CRAs) are ignorant and lacking in credibility.

A history of success has helped to build the century-old rating agency`s influence in the industry, but its reputation has been battered many times in recent years, and some see it as being arrogant and pretentious. Even now, there is no theory that can precisely explain economic phenomena in a country or region, or vastly different economic environments, let alone make a forecast. Naturally, there are reasons behind the success of Moody`s, but it needs to be noted that Moody`s success is based upon its understanding of the US market environment. If detached from the US environment, the big three US rating agencies - Moody`s, Standard & Poor`s (S&P) and Fitch Group - would face doubts over whether they could fully and meticulously understand the factors that could have an impact on a country`s economy, including the country`s policy framework, laws and regulations, as well as its culture and tradition. The CRAs` arrogance has long accumulated, and makes it hard for them to truly come up with precise judgments.

Another crucial concern over the CRAs is whether they can remain objective and fair. It is known that credit rating agencies are paid by bond issuers instead of investors. In a particular case, the CRAs were widely believed to have contributed to the 2008 mortgage crisis by giving top ratings to sub-prime mortgage-backed securities that later deteriorated, which hampered public trust in their ratings.

Even though Moody`s has established its reputation, whether its ratings are authentic is wholly up to the market to decide. Moody`s should understand the Chinese development model more deeply and note that it is very difficult to restore a damaged reputation.

The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China and former deputy secretary-general of the China Banking Association.