“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.