Home > economy, News, trade > Dagong rates U.S. credit worthiness below China’s and the impeccable timing of the report

Dagong rates U.S. credit worthiness below China’s and the impeccable timing of the report

China unveils first sovereign credit rating report,” and this news is spreading like wild fire in the West. One reason is the report ranking the U.S. lower than China. Here is a brief take on it at Seeking Alpha: “The Unthinkable: U.S. Stripped of AAA Credit Rating by Chinese Agency.” The English version of the report is here. While Dagong Global Credit Rating Co., Ltd. (大公国际资信评估有限公司), has been around in China, this is the first time the rating company reporting on sovereign credit worthiness.

The timing for Dagon Global Credit Rating Co., Ltd., is simply impeccable. This comes at a time when the established Western players like Moody’s and Standards & Poor’s have largely been blamed for much of the financial crisis in the West. Even Paul Krugman, the most outspoken critic of the RMB valuation had this to say about the credit agencies of the U.S. subprime mortgage melt down, (“Berating the Raters“):

No, the e-mail messages you should be focusing on are the ones from employees at the credit rating agencies, which bestowed AAA ratings on hundreds of billions of dollars’ worth of dubious assets, nearly all of which have since turned out to be toxic waste. And no, that’s not hyperbole: of AAA-rated subprime-mortgage-backed securities issued in 2006, 93 percent — 93 percent! — have now been downgraded to junk status.

The U.S. credit rating firms in Europe are no less controversial. “European officials question U.S. debt-rating firms” reports:

Some European officials are calling for curbs on rating agencies like Standard & Poor’s, Moody’s Corp. and Fitch Ratings. They argue that conflicts of interest and bad information make the agencies’ assessments unreliable, even dangerous.

German Foreign Minister Guido Westerwelle cited the potential conflict of interest of having the rating firms develop, sell, and rate financial products all at the same time.

The China Daily article reported Dagong unveiling of the report:

Guan Jianzhong, chairman of Dagong, said during a press conference in Beijing to introduce China’s first sovereign credit rating report, that the current Western-led rating system “provides incorrect credit-rating information” and fails to reflect changing debt-repayment abilities.

“We want to make realistic and fair ratings and mark a new beginning for reforming the irrational international rating system,” Guan said.

Interesting enough, U.S. Treasury Secretary Timothy F. Geithner was on ABC’s “This Week” program in February 2010. Here is a snippet from Washington Times:

Treasury Secretary Timothy F. Geithner says that the U.S. government “will never” lose its sterling credit rating despite big budget deficits and a newly increased debt limit that now tops $14 trillion.

Mr. Geithner says in an interview broadcast Sunday that in times of economic crisis, international investors will continue to buy U.S. Treasury bonds because the bonds are a safe investment.

Moody’s Investors Service recently issued a warning that the government’s credit rating eventually could be in jeopardy if the nation’s finances don’t improve. The cost of borrowing would increase significantly if the ratings service lowered the credit rating, also known as a bond rating, for U.S. Treasuries.

Of course, the one million dollar question is: how will the Chinese government use this report to adjust her foreign investments. For sure, Chinese companies – as well as companies around the world will rely on the report.

Don’t let the Western media’s hysteria on Dagong throw you off though. An “AA-” rating for the U.S. is still a relatively “good” rating. As Geithner says, “the bonds are a safe investment.” And that is simply true. There is no country on this planet can match the U.S.’s military, and the political system is relatively stable. Of all the ships in the ocean, the U.S. is like the aircraft carrier.

In fact, with the escalating financial crisis in Europe, there has been a surge in demand for U.S. bonds. One of our favorite authors on China Daily, Zhang Monan, writes, “US Treasuries as safe assets.”

In the high tech industry, companies often look for opportunities to enter markets. Timing is extremely important. Dagong has seized a great opportunity – where rating agencies like Moody’s and Standard & Poor’s have put a large wedge in the door.

  1. July 15th, 2010 at 17:29 | #1

    Here is what a reader, Abegaz, over at Seeking Alpha had to say:

    So the Dagong Global Credit Rating agency has downgraded US debt. Does it matter? You better believe it does.

    First, up until yesterday most people had never even heard of Dagong nor were even aware that a major market rater other than the big three even existed. They know now. And so Dagong has made a big splash by targeting a reduced rating on US debt and by so doing sent a signal that the ratings issued by Fitch, Standard and Poor’s and Moody’s are perhaps not an honest reflection of the market it’s conditions or the state of US finances. It tells us that they see a legitimate risk developing. Big surprise.

    So who cares what a Chinese upstart bond and credit rater has to say. They have no pull, right? Well only in Asia perhaps. Gee, isn’t that the market where the US is selling most of it’s T-Bills.

    What is implied by Dagongs downgrade is that Asia and the Chinese in particular want a better rate of return, a risk premium on the money it is loaning or the buying could fizzle. And we know downgrades often result in rate changes although in this particular case I doubt any will materialize over the medium term. The thing is that Dagong, a company barely a decade old is challenging the old guard and there is a big opportunity for them if they start turning out results that buyers trust. First amongst users though will be Asians who have come to distrust the old standby’s and that is why this companies entry into what was essentially a closed old school network will start making waves as it grows over the years.

    Yesterday they made an announcement that cannot be ignored and made a name for themselves. Tomorrow their opinions may become sought after if they can establish legitimacy and generate a track record of fairness.

    This is a big deal. It is a game changer.

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