The dispute between Washington and Beijing about monetary policies and trade imbalances has spilled over into the more arcane world of debt ratings.
Citing concerns about Washington’s capacity to repay debt and the potential impact of another round of quantitative easing by the Federal Reserve, an unheralded Chinese bond rating agency has slashed its sovereign credit rating on U.S. government debt to the equivalent of single-A-plus from double-A, with a negative outlook.
The rebuke is mainly symbolic; the rating cut by Dagong Global Credit Rating Co. Ltd. will not have any impact on the market. But it is another sign of growing world anger over the U.S. decision to further loosen monetary policy and could be another indication the Chinese are becoming disenchanted with U.S. Treasury bonds.
Major mainstream rating agencies, such as Moody's Investors Service and Standard & Poor's, still give Washington their top, triple-A rating, despite also expressing concerns about soaring debt levels and record deficits.
Politics is readily apparent in the Dagong decision, market watchers say. The move came just two days before the next Group of 20 summit gets under way in Seoul. China’s undervalued yuan, a weaker U.S. dollar and growing world anger over the U.S. decision to further loosen monetary policy are expected to take the spotlight.
Dagong, which has government connections, may also be seeking a measure of revenge after its application to become a Nationally Recognized Statistical Rating Organization (NRSRO) in the U.S. was rejected in September by the Securities and Exchange Commission. Only ratings issued by NRSROs are eligible to be used by banks, insurers and other financial entities to meet certain U.S. regulatory requirements. Many pension funds and other big buyers of bonds insist on them as well.
Without such a designation, a rating agency is effectively restricted from operating in the world’s largest capital market. Foreign debt monitors that carry the valuable SEC stamp of approval include Canada’s Dominion Bond Rating Service and two Japanese firms.
“It’s a shot over the bow,” David Ader, head of government bond strategy at CRT Capital Group in Stamford, Conn., said Tuesday. “We should care about what the Chinese think of the U.S. debt situation. They’re big buyers of U.S. Treasuries.”
That Beijing may be getting nervous about the safety and value of its vast holdings of U.S. Treasuries is reflected in its lower purchases in recent months.
But the actual rating cut will not have any impact on the market, Mr. Ader said. “They have a specific axe to grind, because of what happened to them, not being allowed to act as a rating agency here, and they’re not the mainstream.”
Dagong also rates China ahead of the U.S., Britain and Japan, which “doesn’t quite fit,” he said.
After its rejection by the SEC, Dagong pointedly declared that “China, as the biggest creditor of the United States, [should] share the discourse power of credit rating in the U.S. market.”
In announcing the latest downgrade – it had cut the U.S. to double-A in June – Dagong analysts Lu Sinan and Du Mingyan cited the quantitative easing and a “deteriorating debt repayment capability and drastic decline of the government’s intention of debt repayment.”
The rating agency, which was founded 16 years ago with the approval of the central bank and Beijing’s former Economic and Trade Commission, warns that Washington may “continue to expand the use of its loose monetary policy, damaging the interests of the creditors. Therefore, given the current situation, the United States may face much unpredictable risks in solvency in the coming one to two years.”
