The (Delayed) Ascent of PRC Rating Agencies

There was another large controversy about Chinese firms operating Stateside three years ago when the PRC-based credit rating agency (privately-owned, mind you) Dagong was denied by the SEC from being granted Nationally Recognized Statistical Rating Organization (NRSRO) status. As IPE Zone readers know by now, NRSRO status is important insofar as gaining this recognition allows a credit rating agency to legitimately evaluate what is still the most liquid capital market of them all for dollar-denominated debt. Then, the SEC claimed that Dagong could not comply with the Feds' standards for tranparency if so required:

[W]e find that we must deny Dagong's application because, irrespective of the jurisdictional question, it does not appear possible at this time for Dagong to comply with the recordkeeping, production, and examination requirements of the federal securities laws.

The "jurisdictional question" concerns the Chinese SEC equivalent the China Securities Rating Commission (CSRC) having its own set of rules concerning access to such documents. At any rate, Dagong was partly culpable in not properly explaining how it would handle SEC requests for information about ratings in terms understandable to Westerner bureaucrats. Dagong even threatened to sue, but nothing came of it:

Chinese rating agency Dagong Global Credit Rating Co. called the Securities and Exchange Commission's recent denial of its application as an officially recognized bond rater in the U.S. discriminatory and said it considers taking legal action against the agency.

In a strongly worded statement posted on the company's website Sunday, Dagong said SEC's sole reason for denying its application is the commission can not conduct cross-border supervision over the Chinese firm.

At any rate, Dagong has not given up on its quest to become a global player in the ratings game. Aside from the publicity stunt of downgrading US debt from AAA status before S&P, it now has done what few PRC ratings firms are willing to do in downgrading local issuances regardless of the argument that the government always stands ready to bail out SOEs which constitute a large part of the Chinese economy:

At the end of June, Dagong Global Credit Rating Co. broke ranks with its local competitors and downgraded three bonds issued by infrastructure-construction companies wholly owned by Chinese cities. It said it was losing faith in the governments' backing of the bonds [...] The three bonds Dagong downgraded—for the infrastructure-construction arms of local governments in Jilin, Jiangxi and Hubei provinces—had their ratings lowered by only one notch and still are rated investment grade.

Another strategy aside from establishing an image of political independence at home is using Europe instead of the US as Dagong's Western beachhead:

Dagong's go-it-alone stance is a measure of its ambitions. Chairman Guan Jianzhong—a trained accountant who took over in 1998 and owns a chunk of the 20-year-old private firm, according to a person familiar with the company—has spoken bullishly about the need to break the lock-hold Standard & Poor's Ratings Services, Moody's Investors Service and Fitch Ratings have on global debt ratings. Dagong hopes investors would be open to a new ratings firm after the global financial crisis resulted in a major loss of faith in the established players.

European regulators have taken note. In June, before the downgrades, six European Union regulators approved the registration of Dagong's Milan-based unit, allowing it to rate companies in Europe. Dagong previously had been turned down by the U.S. Securities and Exchange Commission in 2010 after it applied to do the same in the U.S.

The best way to combat Western discrimination is to tell it like it is when handing out ratings, since being proven right by subsequent bond issuer performance is the best way to gain others' confidence. Besides, who exactly is going to argue that Western ratings firms are any good in this day and age? As bond issuances increase from China in particular and East Asia in general, the clout of Asian ratings firms should increase accordingly.

The lame 2010 NRSRO application aside which appeared to fail due to unpreparedness as much as discrimination, it's only a matter of time. 

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Meet America's #2 Jetliner Company...Airbus S.A.S.

Mas oui! There's an old joke that the best car made in America is the (Ohio-made) Honda Accord. Similarly, we may soon hear that the best jetliner made in America is the (Alabama-made) Airbus A320. Following the lead of Mercedes-Benz, the multinational European concern has decided to set up shop in the land of the Crimson Tide to meet US demand for its bread-and-butter Boeing 737 competitor. The post below talks about how the Chinese have been continually frozen out of investing in the US over increasingly dubious "national security" grounds. Yes, there remains that brouhaha over it being forced out of a contract to make the US Air Force's next generation air tankers, but that was not really over "national security" but over "buy American" objections. The Europeans being Europeans, there are no such concerns with Airbus investment in the commercial sector despite its long-running WTO dispute with Boeing. Speaking of whom, unfavourable attention regarding the 787 Dreamliner's design faults may, by default, work in the European consortium's favour insofar as there are only two real players in this industry at present.

There is now an MSN contribution from Allan McArtor, chairman of Airbus Americas, about the consortium's selection of Mobile, Alabama as the site of forthcoming A320 manufacture after originally selecting it to build the shelved tankers:

It's the same with our relationships with the people of Alabama. When our team first started looking for an industrial base to manufacture a refueling tanker for the U.S. Air Force, hundreds of cities stepped forward. After an exhaustive evaluation process, Mobile emerged as the obvious choice.

Sure, it met our technical requirements. But so did others. A differentiator for Alabama was the unity and supportive purpose shown by every entity in the state supporting Mobile. City, state and federal representatives (Republicans and Democrats alike) came together with one goal: Show the Airbus team that Alabama would be its partner for the long term.

They spoke with one voice, which impressed our selection committees. And when the U.S. tanker project was lost, instead of hanging their heads and walking away, they said, "What else could we do?" It was indicative of the good relationship Airbus has with Mobile and Alabama—instead of giving up, we found another way to make it work. As a result, Alabama got an even better, larger-impact project.

Infrastructure was another key factor: The site was perfect, with an airport and ocean port, and adequate land at Brookley Aeroplex. Workforce was also vital. We were encouraged by the auto industry's success in Alabama because its manufacturing aspect is a trained skill similar to that of aircraft assembly. 

All's well and good, but an unspoken reason here regarding human capital is that foreign investors prefer investing in the American South--the Sun Belt--is because of its largely non-unionized workforce compared to the Rust Belt. I was struck how Alabama's officialdom explicitly mentions this selling point that Mercedes-Benz there has little use for unions:

Alabama's Mercedes-Benz plant, the subject of an active organizing campaign by the United Auto Workers, doesn't need a union, Gov. Robert Bentley said. The governor was at the Tuscaloosa County plant last week to participate in a sendoff for its president and chief executive, Markus Schaefer, who is taking an executive role at the automaker's headquarters in Stuttgart, Germany.
After the event, Bentley said the plant is a close-knit organization that works well together as a team."I really don't believe they have any need for unionization and an intermediary between them and management," he said in an interview in response to a reporter's question about the UAW campaign. "I don't think it's going to happen."

The governor added that Alabama's status as a right-to-work state helps him recruit new business. Bentley's comments are the most pointed public ones to date from a state official about the UAW's latest campaign at the Mercedes plant, which launched Alabama's auto industry in the 1990s. Previous organizing attempts there have failed.

Having escaped the clutches of European unions, you'd hardly think they'd be enthusiastic about setting up shop in America only to find that it too is thick with them. Hence the continuing popularity of Southern right-to-work states; keep the unionized whingers in the Midwest (and Western Europe too for that matter).

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Latest US China-Bashing: Hog Farm Protectionism

I am a true connoisseur of all sorts of protectionism: the more obscure and inscrutable the justifications for it, the more I savour the hypocrisy. Free trade? Get outta here! In recent years, the United States has served up some of the more ridiculous examples of what is, at heart, unvarnished racism on the part of American lawmakers. (You don't see them block European foreign investment on a regular basis, do you?) When the purchase of minor American producer Unocal by Chinese SOE CNOOC, "national security" concerns were raised. There was also the matter of 3Leaf, a minor player in the server market, being subject to Committee on Foreign Investment in the US (CFIUS) harassment over interest from Huawei. Nevermind that 3Leaf was a marginal player in the server market in the same way UNOCAL was in energy, but rampant and rather irrational fears of Chinese snooping on US data were in play. After the Snowden incident, Xinhua correctly described the utter hypocrisy behind American data security concerns with the US being "the biggest villain of our age" in cyber-snooping activities.

 More recently, we have had the latest twist on American "national security" concerns regarding the Chinese. It doesn't really matter that the suitor in question isn't an SOE; I guess Yanks believe once you've seen one of them you've seen them all. I am thus wryly amused by this latest form of "hog farm protectionism" as China's Shuanghui International attempts to purchase America's Smithfield International.

A Senate committee on Wednesday criticized a major merger of U.S. and Chinese agricultural interests, saying the combination of two major pork producers could have negative impacts on U.S. food and economic security.

The hearing before the Senate Committee on Agriculture, Nutrition & Forestry was exploring the impact of a proposed merger between Smithfield Foods, the leading pork producer in the U.S., and Shuanghui, China’s largest pork producer.

The $7.1 billion acquisition is the largest purchase of a U.S. company by Chinese business interests. The merger sparked skepticism from committee members who were concerned about Smithfield’s ability to maintain compliance with food-safety standards expected in the U.S.

Read more here: http://www.mcclatchydc.com/2013/07/10/196351/senate-committee-wary-of-us-china.html#.UeFeNKxjuSo#storylink=cpy

A former US trade official, Robert Herztein, added fuel to the fire by tortuously describing this "hog farm protectionism" in terms of the Chinese unleashing tainted food products on an unaware American public:

It could, of course, be a stretch to conclude that Chinese ownership of Smithfield, the world’s largest pork producer, might impair U.S. national security...Reports of egregious food adulteration in China suggest a culture where companies have little concern for safety and health standards.

While there has been an episode of a supplier providing tainted meat to Shuanghui, it has since increased its monitoring of its supply chain. (I invite Shuanghui's critics to find the smoking gun that indicates Shuanghui promoted the use of chemicals hazardous to human health instead of implying this to be the case. Moreover, Herzstein conveniently ignores that Smithfield has been scaling back use of the controversial drug ractopamine in order to meet Chinese demands to be free of this feed additive. In the last year, Smithfield has lessened ractopamine usage in half--presumably in expectation of a China deal: 

This March, China began requiring third-party verification that U.S. pork products were ractopamine-free. Russia, the sixth-largest buyer of U.S. pork, had blocked imports of U.S. meat using ractopamine weeks before...The measures highlighted a sharp contrast with the U.S. Food and Drug Administration, which approved ractopamine for use in commercially-raised swine in 1999 and stands by that decision, saying its safety has been corroborated four times. It is used in more than half of the U.S. hog herd, analysts estimate.

By early May [2013], Smithfield already had moved two of its plants - including Tar Heel, North Carolina, the world's largest pork-processing facility - off ractopamine. When the third plant converts on June 1, "over 50 percent of our operations will have no ractopamine as part of their feed rations," CEO Pope said.

Shuanghui also has its own rather self-serving FAQ, but nevermind: I am honestly at a loss as to why Americans always ascribe the worst to the Chinese. Given such intense scrutiny, how likely would it be that they would (a) divert fuel supplies meant for the US to China, (b) build routers to deliberately spy on American communications or (c) risk a mass poisoning of American pork consumers? It makes no sense. Not only would they lock out other Chinese firms from investing in the US for years and years, but the ferocious backlash would ensure that their days of doing business Stateside are numbered. Forced divestiture or a massive public boycott; the result would be the same.

As a more pragmatic, less ideological sort, here's my suggestion to the Yanks: Why don't you let the Chinese invest and see what happens instead of pigging out on racist protectionism all the time? I truly doubt that egregious violations of public safety on a massive scale would occur, Snowden-style. For aforementioned reasons, getting rid of "national security" transgressors would be so very easy and set an example besides.

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