China should reduce its reliance on overseas rating companies by encouraging large financial institutions to strengthen their research and make their own judgments, central bank Governor Zhou Xiaochuan said.

The nation is also considering establishing credit-rating companies backed by the government, Zhou said at a financial forum in Beijing Sunday. A copy of his speech transcript was posted on financial news portal hexun.com.

Zhou’s remarks reflect China’s desire to seek alternatives to the top-three global rating companies amid skepticism among officials about the firms’ independence. The nation set up its first rating company that makes investors rather than borrowers pay, called China Credit Rating Co., in September last year. 

“With the rapid expansion in China’s bond market, we need rating companies that are familiar with the Chinese situation,” said Lu Zhengwei, Shanghai-based chief economist at Industrial Bank Co., who was rated the nation’s best analyst in 2010 by China Business News newspaper. “We see comments from rating companies during this round of the crisis have influenced the financial market to a large degree. It’s no surprise China is paying attention to them.”

Overseas rating companies’ earnings models cause “a strong beneficial alliance between the issuer and the ratings agency that cannot avoid influencing the agency’s independence,” said the National Association of Financial Market Institutional Investors in a draft report seen by Bloomberg News last July. The association was formed by the central bank in 2007 to help develop the country’s over-the-counter financial markets.

One possibility for nurturing local rating companies is to require that a domestic firm also rate a local financial product if one of the international companies does so, said Zhou, the governor of People’s Bank of China. Moody’s Investors Service, Standard & Poor’s and Fitch Ratings are the three biggest rating companies.

Domestic rating firms can play a larger role by researching the finances of local or municipal government, an area in which foreign companies lack expertise, Zhou said.

The State Council, China’s cabinet, has designated the central bank to regulate the country’s credit-rating companies, making it the sole regulator of the industry, local media reported last week. 

(Bloomberg)