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Chinese agency downgrades US credit rating: should you care?

Thursday, 17 Oct 2013 | 10:54 PM ET
America downgraded by its largest creditor
Thursday, 17 Oct 2013 | 8:08 PM ET
China signals unhappiness with Washington's budget deal after local ratings agency Dagong downgraded America's credit rating to 'A-.' The Asia Squawk Box team and Marc Desmidt of BlackRock Asia Pacific weigh in.

The U.S. debt-ceiling debacle may have led China's Dagong Global Credit Rating to downgrade its U.S. sovereign debt rating, but analysts say it's unlikely to impact China's decision to hold Treasurys.

"I don't see there being a massive change to [China's] asset allocation towards Treasurys. Look at the level of FX reserves they have, there's no other market that provides the liquidity that they need," said Chris Weston, chief market strategist at IG. "There will be some diversification, but there's no other market that can house the size of capital that they have."

China is the biggest foreign holder of U.S. government debt. At the end of July, China held $1.28 trillion in Treasurys, accounting for roughly 22.8 percent of all foreign holdings of U.S. government debt.

(Read more: Funds' shift away from US isn't just about the debt ceiling)

Dagong, one of China's top four ratings agencies, cut its rating on U.S. sovereign debt to "A-" from "A" on Thursday, maintaining a negative outlook. Dagong has a similar ratings scale to S&P and Fitch, with "AAA" marking the highest rating. It argued that the deal reached by Congress to end the partial government shutdown and raise the debt ceiling will only avert a crisis temporarily.

A look at Dagong's credit ratings:

"The fundamental situation that the debt growth rate significantly outpaces that of fiscal income and gross domestic product (GDP) remains unchanged," Dagong said on its website.

"For a long time the U.S. government maintained its solvency by repaying its old debts through raising new debts, which constantly aggravates the vulnerability of the federal government's solvency. Hence the government is still approaching the verge of default crisis, a situation that cannot be substantially alleviated in the foreseeable future," it added.

While analysts don't expect the downgrade to impact China's holdings of U.S. Treasurys, they agree that it sends a clear message.

Raymond Boyd | Michael Ochs Archives | Getty Images

"They are sending a signal - saying look we are your largest creditor and we're upset - and I think that comes through in that ratings downgrade," said Marc Desmidt, managing director and head of alpha strategies at BlackRock Asia Pacific.

IG's Weston agreed, noting the downgrade sends a message to U.S. lawmakers that China does not want to see a replay of the debt ceiling drama.

(Read more: US crisis over, will China re-think Treasury holdings?)

While the downgrade puts Dagong's U.S. credit rating on par with Dagong's ratings for Brazil, Israel and Panama, some analysts downplayed the importance of this.

"I think it would have more credibility if they weren't giving 'AAA' ratings to non-performing bankrupt local government financing vehicles," said Patrick Chovanec, chief strategist at Silvercrest Asset Management. "They tend to be hyper sensitive to risks around U.S. Treasurys and blind to risks of bad debt growing in China," he added.

Chovanec of Silvercrest Asset Management says Dagong's move is unlikely to foreshadow similar action by the major U.S. ratings agencies.

(Read more: CNBC Explains: The debt ceiling)

Fitch Ratings on Tuesday put the U.S. government's "AAA" credit rating on 'rating watch negative' ahead of the resolution, noting that the standstill on the debt ceiling negotiations risks undermining the effectiveness of the country's government and political institutions.

Dagong's move prompted a reaction from people on Twitter, with Conrad Tradewell questioning whether it reflects a shift in the balance of power towards the East:

Some wondered why the decision wasn't getting more media coverage.


— CNBC's Ansuya Harjani; Follow her on Twitter @Ansuya_H

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