Kamakura Enters Risk Alliance With China's Xinhua

By Maria Trombly | Securities Industry News | October 24, 2005

Seeking to fill a big regional void in market data, Honolulu-based risk systems specialist Kamakura Corp. has joined forces with China's Xinhua Finance data company to provide market and credit risk information to emerging markets in China and elsewhere in Asia.

The companies say a lack of market information is delaying maturity of the Chinese capital markets; the country's stock market is at eight-year lows--along with investor confidence. "Too often in rapidly growing capital markets, investors who are new to trading have been taken advantage of, paying some very expensive tuition to learn how markets and dealers work," said Kamakura CEO Donald van Deventer.

Advanced credit analytics can address some of these concerns. "We have long appreciated that there is a strong interest in consuming risk information at individual desks of traders or analysts," van Deventer said. "This alliance with Xinhua will make that delivery channel and product offering available."

Risk analysis in China is based largely on subjective judgments, noted Thomas Liu, professor of finance at Shanghai's Jiao Tong University. "There should be a model that values risks objectively, depending instead on quantitative analysis." Should such tools become widely available, he adds, it will particularly help enterprises that depend the most on accurately evaluating risks, such as banks and insurance companies.
The companies' joint product will help Chinese banks meet Basel II capital minimums, thus addressing both the requirements of risk management and those for external ratings.

For example, banks making arbitrary credit and lending decisions contributed to the country's massive nonperforming loan burden. "Credit risk is the main risk in the market," Xinhua Finance CEO Fredy Bush said. She agreed that better risk assessment tools can help China's financial sector mature. "Anytime you can provide industries, companies and banks access to risk information, you make the market more stable," she said.

Kamakura will adapt its Risk Manager product and Risk Information Services platform for the Chinese market. The company has long served clients in Asia in the areas of integrated market risk, credit risk, and asset and liability management. The Chinese effort will include language translation but will go beyond that, said Bush: "The Kamakura system is such that people can put in different fundamentals so that it can be adapted to local needs."

In comparison with China and other emerging markets, companies in the U.S. are more regulated and their financial reporting is more transparent and reliable. As a result, profitability is given less analytical weighting in Asia than in the U.S. Other local differences that are factored in include interest rates and economic output.

Through the alliance, Xinhua will be able to provide estimated default probabilities and default correlations for a wide range of public and private entities in China. It will also provide market risk analytics for a variety of traded instruments. Kamakura will contribute a license for its software as well as access to key personnel, while Xinhua is contributing an undisclosed amount of capital. The first product of the alliance is expected to be delivered in the first quarter of 2006.

According to Ivan Chung, managing director for credit ratings at Xinhua, the accuracy of the Kamakura model can go as high as 90 percent. Combining Kamakura risk analytics with Xinhua's Chinese company database, he says, puts the combination head and shoulders above the competition. That includes KMV, a Moody's Investor Service subsidiary, which he says cannot match Xinhua's data.

In addition to providing more accurate risk analysis, the new product can also address the skills gap in Chinese financial firms. "There are not many people available who are trained to be credit engineers, assessing risk management in a bank," Chung says. "And even if you do it well, it will take a lot of time. Insurance companies' portfolios are hard to calculate by hand."

The system will help Chinese banks meet Basel II capital minimums, thus addressing both the requirements of risk management and those for external ratings. "Internally, it can enhance risk management," Chung explains. "Externally, it can help meet the requirements of the regulator."

The system can also be used to help value investment products, such as asset-backed securities, which are just being introduced in China.

Finally, the system can be used to manage foreign exchange risk, Chung says. "For example, the RMB [the yuan, China's national currency] is predicted to appreciate, and the model can take this into consideration."

"China's weak ratings industry has a lot to do with the lack of information and transparency," said Gongdi Huan, general manager of Beijing's New Chintoz Investment Consulting Company Ltd. New Chintoz provides credit ratings to individual companies but is not a direct rival of Xinhua.

"Xinhua seems to collect data in informal channels from individual companies and from public news sources," he said. "The incomplete character of information is a crucial problem for the whole rating industry, not only Xinhua."

Wendy Yu contributed to this report.