China Downgrades US Credit Rating From A- To BBB+, Warns US Insolvency Would “Detonate Next Crisis”

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Originally appeared at Zero Hedge

In its latest reminder that China is a (for now) happy holder of some $1.2 trillion in US Treasurys, Chinese credit rating agency Dagong downgraded US sovereign ratings from A- to BBB+ overnight, citing “deficiencies in US political ecology” and tax cuts that “directly reduce the federal government’s sources of debt repayment” weakening the base of the government’s debt repayment.

Oh, and just to make sure the message is heard loud and clear, the ratings, which are now level with those of Peru, Colombia and Turkmenistan on the Beijing-based agency’s scale of creditworthiness, have also been put on a negative outlook.

In a statement on Tuesday, Dagong warned that the United States’ increasing reliance on debt to drive development would erode its solvency. Quoted by Reuters, Dagong made specific reference to President Donald Trump’s tax package, which is estimated to add $1.4 trillion over a decade to the $20 trillion national debt burden.

“Deficiencies in the current U.S. political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track,” Dagong said adding that “Massive tax cuts directly reduce the federal government’s sources of debt repayment, therefore further weaken the base of government’s debt repayment.”

Projecting US funding needs in the coming years, Dagong said a deterioration in the government’s fiscal revenue-to-debt ratio to 12.1% in 2022 from 14.9% and 14.2% in 2018 and 2019, respectively, would demand frequent increases in the government’s debt ceiling.

“The virtual solvency of the federal government would be likely to become the detonator of the next financial crisis,” the Chinese ratings firm said.

* * *

In a preemptive shot across the bow in the coming trade wars, last week Bloomberg reported that Beijing officials reviewing China’s vast foreign exchange holdings had recommended slowing or halting purchases of U.S. Treasury bonds. That warning spooked investors worried that sharp swings in China’s massive holdings of U.S. Treasuries would trigger a selloff in bond and equity markets globally. The report sent U.S. Treasury yields to 10-month highs and the dollar lower, although China’s foreign exchange regulator has since dismissed the report as “fake news.”

Still, Dagong was quick to point out that not much would be needed to crush the public’s confidence in the value of US Treasurys:

The market’s reversing recognition of the value of U.S. Treasury bonds and U.S. dollar will be a powerful force in destroying the fragile debt chain of the federal government,” Dagong said.

* * *

To be sure, China’s move is far more political than objectively economic, and is meant to send another shot across the bow as the Trump administration prepares to launch a trade war with Beijing in the coming weeks. Still, while both Fitch and Moody’s give the United States their top AAA ratings (and the S&P is the only agency to infamously downgrade the US to AA+ in 2011), US raters have also expressed concerns similar to Dagong‘s. From Reuters:

S&P Global said last month’s proposed U.S. tax cuts would increase the federal deficit and looser fiscal policy could prompt negative action on U.S. credit ratings if Washington failed to address long-term fiscal issues.

In November, Fitch said the tax cuts would give a short-lived boost to the economy, but add significantly to the federal debt burden. It warned that the United States was the most indebted AAA-rated country and ran the loosest fiscal policies.

Moody’s said in September any missed debt payment as a result of disagreement over lifting the debt ceiling, a perennial point of partisan contention in Washington, would result in the United States losing its top-notch rating.

China is rated A+ by S&P Global and Fitch and A1 by Moody‘s, with the three agencies citing risks mainly related to corporate debt, which is estimated at 1.6 times the size of the economy and mostly attributed to state-owned firms.

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  • Rodger

    This is much to subtle a warning for Trump to understand. China you are doing it wrong! (But I think it’s a great move.)

    • FlorianGeyer

      ” the ratings, which are now level with those of Peru, Colombia and Turkmenistan ”

      I did smile at that Rodger :)

      • Daniel Castro

        To be fair I would trust much more in a turkomeni or a peruano than a ziomurican.

        • FlorianGeyer

          I agree 100%.

      • Rodger

        It’s some Asian level trolling for sure. :P

        • Tommy Jensen

          Its a bait.
          On RI Russia is showing all their central bank gold, and China goes public with lower US rating.
          Now its up to US to get excited and go to war somewhere.

    • Ivan Freely

      I agree. Far too subtle. One needs to take a brutal in-your-face approach, in order to get Washington’s attention.

  • BL
    • Daniel Castro

      Go Trumpo!

      • Margaret

        Go-o-gle is p-a-ying $97 per hour,w-i-th weekly payo-u-ts.You can also avail th-i-s.O-n tuesday I got a brand new Land Rover Range Rover from having ea-r-ned $11752 this last four weeks..w-i-th-out any doubt it’s t-h-e most-comfortable job I have ever done .. It so-u-nds unbelievable but you wont forgive your-s-elf if you don’t check it!jw141n:>>> http://GoogleDailyConsumerDayJornalsJobsReport1/easy/jobs ♥♥♥k♥♥n♥p♥u♥♥♥h♥c♥♥w♥y♥♥z♥i♥f♥♥k♥v♥u♥♥g♥♥m♥♥♥x♥♥n♥♥♥m♥♥♥n♥♥♥q♥♥♥u♥♥♥r♥♥♥j♥o:::::!ox632v:lh

  • Hide Behind

    US shareholders own less than 10% shares of any major oil firms within US. You have minor players. Pipelines, drilling firms, that have only a short term addition to labor force. As once fields are drilled and pipes laid it is but a very small workforce needed to maintain.
    ROYALTIES TO US GOVERNMENT ARE AT LOWEST COST IN HISTORY, and thereby are an actual subsidy to all forms of mineral and energy. Forestry extraction.
    As the temporary boom towns complete drilling they move on to other areas, leaving towns and counties who boosted bureaucracy by 10 fold, now having to pay for infrastructure with declining populace, unemployed populace, stuck with inflated tax roll values towards homes and smaller business.
    Untold is the cost of the destruction to aquifers, loss of farmlands, and fact that it will only cause people to move towards heavily populated municipalities.
    Also left untold is the vast increase of Federal and state take over by their high paid workers upon local politics, and upsetting wage scales from boom town levels, as field work is completed.
    Pipelines of Canadian multinational firms of crude and natural gas condensates do not benefit American populace workers or retirees, as it is almost totally for export.

    • Blaine

      Look no further than Central and South American countries that are controlled by US and Canadian corporations to see what’s in store for the US.

      Public debt is a good thing now, as it only increases the amount of govt held property and services that will be sold off at discount once the Federal Govt runs out of credit.

      • Hide Behind

        The sell of of US public’s resources is already underway and has been for quite a few years; take note of vast tracts of western lands to Barrick Mining, Canadian Brit owned, and all the recent exposure of sell off to both Russi a and Russia-Canadian uranium rights.
        As a side note: The recent Bundy Stand off in Nevada had a lot to do with sell off of huge land mass to
        Speculation with Chinese foreign interest, public lands. Then the Oregon stand off was indeed about loss of farmers access to public lands but the reason for was never allowed to be brought fully into open due to Assassination of one member and arrest of others as they were headed to give talks of why.
        That so called preserve for Sage Grouse lands had sold out uranium mining concessions to a Canadian Russian partnership .
        NOTE: ALL DURING TIME BILL CLINTON WAS DEPOSITING BAGS OF CASH IN OFF SHORE CHARITY ACCOUNTS WHILE WIFE HILLARY WAS sEC. OF STATE.
        Americans do not understand that firms like Barrick Gold get gold mineral rights they only pay royalty of the gold, can mine tons of silver or other minerals and sell royalty free.

      • freewheelinfranklin543

        When Nixon took us off the Gold Standard the bastard put the public lands on the debt as collateral.They intend to sell them off to pay off the onerous,usurious debt which is illegal and immoral as well as UnConstitutional.
        It is just about Yankee Doodle Time!

      • Terra Cotta Woolpuller

        Most of these Companies everyone is quick to claim as Canadian ,US,UK,EU etc. are all Multinationals owned by the same oligarchs, they only benefit those at the top.

  • Olypious

    This part is just pure GOLD :

    ” Oh, and just to make sure the message is heard loud and clear …
    the ratings, which are now level with those of Peru, Colombia and
    Turkmenistan … have also been put on a negative outlook. “

    • Solomon Krupacek

      BBB+ ´positive outlook

      russia has worse:

      S&PBB+
      Positive
      Mar 17 2017

      • Olypious

        Sorry, but I’m reading BBB+ and Negative Outlook in this article.

        By the way, US rating agencies are as fake as their mass media.
        I’ve read somewhere that in term of credibility, it goes like this :
        Dagong >> Fitch > S&P and Moody’s.

        • Solomon Krupacek

          Sorry, but I’m reading BBB+ and Negative Outlook in this article.

          this shows only the niveau of article.
          and of author.

          • Weldon Cheek

            The front on you to actually call out the author of a report on this site!the absolute garbage you talk isnt fit for facebook and thats about as low as it gets!! Amazing!

        • ABSOLUTELY CORRECT

      • Gary Sellars

        FFS Shlomoman, do you always have to be the token uber-tard kid in the class? In your case, stupidity must be a genetic thing….

        • Solomon Krupacek

          another ox arrived …

        • RichardD

          Maybe he has brain damage from advanced syphilis?

          • Weldon Cheek

            Dont forget dutchman or whatever his name is!should call them the stooges.

          • Bob

            The Three (predictable) Stooges:
            Solomon K
            Dutchnational
            Jens Holms

      • Sinbad2

        Love your logic.
        My dog got killed by a car, but it was worse for the other guy, his dog got killed by a bus.

        • Solomon Krupacek

          you are completely out. i wrote only, that this category is pisitive and not negative. he is ruskiephil, therefore i showed hiom, that the weaker russia is still in piositive range. you haters shold finish the garmmar school and read fluently.

          • John Whitehot

            “we haters”

            Then Lovers must love debt, you should broadcast that.

          • Sinbad2

            “you haters shold finish the garmmar school and read fluently.”
            Priceless.

          • Weldon Cheek

            Lol!hes a crank! He just keeps going!

          • Solomon Krupacek

            yes. i have mistypes. this is not school problem.

      • RichardD

        Almost no debt and $350 billion in cash in the bank for an economy the size of Russia is a well run economy.

        https://uploads.disquscdn.com/images/cbe0cc0152cea72631437bf9e01c1df71de9bb6fe004db65b764ecd695e52176.png

      • RichardD

        SK has my comments blocked because he doesn’t want to know what the truth is.

      • John Whitehot

        but the article said negative outlook not positive for US debt.

        Also, involving Russia makes no sense; Russia has no debt while the US has debt for several times its real GdP.

      • Weldon Cheek

        But russia knows its not up there you clown!they are under huge sanctions aswell ,what a typical solomon comment, the fact that russia is atleast bobbing along and getting on with it,oh and still managing to hold its own on a few fronts is quite a feat id say,what state do you think the U.S. would be in if it took a hit even half of what russia is taking? It would be game over,before it got there it would light the fuse and take us all down with it!! Your unbelievable at times!

      • Bob

        Damn, you’re really all about bitching on Russia, no matter what the actual topic of the article – hint this one was about China and US.

        • Solomon Krupacek

          i did nat talk about russia, i talked ONLY about ratings. thats all. its not my mistake, that all of you are uneble to understand. disczsion over!

          • Bob

            ‘BBB+ ´positive outlook…russia has worse:..S&PBB+…Positive…Mar 17 2017’

            That looks rather a lot like you’re talking about Russia right there – you know, the bit where you actually say ‘russia’ (sic) and throw up something negative about Russia as per usual. You are as predictable as clockwork.

          • Solomon Krupacek

            i blessed russia

  • Alex

    If China sells US debt, that will be the end of US economy, so US is creating pressure around China in order to have a leverage.

    • alejoeisabel

      Not true. Only will increase overtime for printing press to make more money.

      • Harry Smith

        Just for understanding how the treasuries market works: US govt issues a paper and says that will pay for this paper 100 dollars after 3 years and the market players buy this paper for 99 or 95 or whatever the market price is. The only value of this paper is US govt credibility. The lower credibility means lower price for paper. There are also 2 nuances. 1st: the BBB+ rating means that banks which are using this rating agency should exclude such papers from their conservative investments profiles. 2nd: the more papers in the market means lower price.
        BTW FRS started slowly selling of their treasuries which they bought while QE program was and as FRS is a private banks conglomerate they will always act for their profit.
        What I can say? Good move China, let’s hope it will be a small lesson for the Wall Street fat cats and they will hold their doggies in Washington.

        • Solomon Krupacek

          “the BBB+ rating means that banks which are using this rating agency

          should exclude such papers from their conservative investments profiles”

          and who trade the papers of countries with much less rating?:

          https://tradingeconomics.com/russia/rating

          • Harry Smith

            “Conservative investing is an investment strategy that involves a focus on lower-risk, predictable and stable businesses. This strategy typically involves the purchase of blue-chip stocks and other low-risk investments. A conservative investing approach also means building a well-balanced portfolio gradually, over time.”

          • Weldon Cheek

            Honestly i dont have a clue about blue chips and trading of papers etc etc but i do believe i can tell shit from shinola and from where im sitting you talk a hell of a lot of shit whilst the majority of commentators (is that the word im looking for?) Seem to be on the shinola highway! And in that last exchange my moneys on Harry!

          • Harry Smith

            Weldon Cheek, man, you made me google for the meaning of “shit from shinola”. It was very informative. Thank you. :)

          • Weldon Cheek

            Doesn’t know shit from Shinola
            What’s the meaning of the phrase ‘Doesn’t know shit from Shinola’?
            Possessing poor judgment or knowledge.

            What’s the origin of the phrase ‘Doesn’t know shit from Shinola’?
            doesn’t know shit from ShinolaShinola was a brand of shoe polish previously manufactured in the USA. The alliteration and the fact that the two commodities in the phrase could possibly be confused is the derivation. The distinction is well made; only one of them would be good to apply to your shoes and only particularly dim people could be expected to muddle them up. Of course, outside America, most people don’t know Shinola from anything at all, as they’ve never heard of it.

          • George King

            A more appropriate term Weldon would have been “Don’t piss on my leg and tell me it’s raining!”

          • Weldon Cheek

            I thought this one did it justice,lol!

          • Harry Smith

            Thanks, man. I’ve found it in Urban Dictionary. Wonderful piece of Americanisms!

    • Terra Cotta Woolpuller

      Thing is China doesn’t seem to be threatened by the US, but the other way around so good on China and those who stand up to the US. The US under El Trumpo the Mad Clown King suffering from BSE (Bull Shit Evacuation) is fast becoming more for the elites everyday. People who come to the US for the land of milk and honey , soon find out the land is milked and words honeyed.

      • Tommy Jensen

        Good one.

    • Solomon Krupacek

      dont dream. if china would sell, can only for cheap money. immediately would come buyers. also in this hour america is the safest place for money. also russians put their money in america.

  • Solomon Krupacek

    This is chinas answer to call of tumpt to hsi ponchi about north korea and chinese trade balance? :DDD

  • Gary Sellars

    “China is rated A+ by S&P Global and Fitch and A1 by Moody‘s, with the three agencies citing risks mainly related to corporate debt, which is estimated at 1.6 times the size of the economy and mostly attributed to state-owned firms.”

    Hmmm… debt owned by state-owned firms to the state-owned banks… in other words, accounting entries… the Chinese gov could instigate debt forgiveness wherever needed and simply write off the debts and restructure the state-owned firms, but the US cannot do this as no domestic holder of T-bills would ever agree to debt cancellation. It simply is anathema to the neoliberal caballists.

  • Sinbad2

    One of the signs that the Soviet Union was on the verge of collapse, was the fleet was all in port.
    Look at the latest US carrier task force deployments?

    • John Whitehot

      it’s probably worse, as the Soviet Fleet wasn’t an instrument of “power projection” but one of defense of home shores.

  • RichardD

    95% of the planet’s Jews live in just 5 nations. 83% in the US and Israel, And the remaining 12% in France, Canada and the UK.

    https://en.actualitix.com/doc/maps/wld/world-map-public-debt-by-country.jpg

  • RichardD

    My advice to my fellow Americans who live outside of the DC beltway and a 50 mile radius of NYC. Is that some triple long gold and silver mining share etfs like JNUG and NUGT, and a leveraged double long silver etf like AGQ would be a good thing to own until the US debt and economic situation gets resolved. Because if there is another financial crisis. The worse that it is, the faster that these type of funds will increase in value. Having some physical gold and silver wouldn’t hurt either.

    – Silver ETFs: Complete Bull and Bear Silver ETF List –

    http://www.pmbull.com/silver-etfs/

    – Gold ETFs: Long Bull and Short Bear ETF List –

    http://www.pmbull.com/gold-etfs/

  • Sinbad2

    All wars are about money, and I believe the US threats to attack North Korea are to try and intimidate China, and stop the upcoming Yuan based oil futures trading.

  • Hide Behind

    DEBT BY US PETRO DOLLARS=TREASURY BONDS AT INTEREST, THAT US LOANS ITSELF.
    CHINA slowly divest itself of US treasuries by using them as payment for goods or investments in other nations, while;
    CHINA, RUSSIA, VENEZUELA, IRAN, PAKISTAN, INDIA, QTAR, KAZAKISTAN, PLUS COUPLE OTHER CENTRAL ASIAN NATIONS, NOW PAY AND ACCEPT GOLD, OR BASKET OF CURRENCIES AND EVEN EACH OTHERS CURRENCIES, BESIDES DOLLARS AS TRADE INSTRUMENTS.
    Now that is part of why the downgrade and recent devaluation of US $.
    Investment grade of US treasury bonds means investors need higher %return interest or will invest elsewhere.
    Also for we poor folk, decrease in dollar value means less price for exports and higher price upon imports.
    While our oil, natural gas exports may increase they will be less expensive for foreign buyers and less profits to the real owners, internationals.
    Remember those advertized and hyped high prices for oil today is talking of sweet crude, and a heck of a lot of our export is high sulphur shale oil and below sweet crude, down to 20 USD $ PER BARREL LESS.
    In fact many states outlaw that oil to be refined, not Texas and soon Feds will change State laws.
    More pollution of US.
    If any European nation swings towards basket currency or direct nation to nation or gold exchange watch not just from BBB+ to BBB but clear down to BBC OR BCC.
    Japan will try to buy US excess currency in order to strengthen $; they have been used for this from way back, but Japan’s recent monetary changes are very inflationary and debt ridden policies, which means they may no longer have oomph they used to have.
    If SHTF by US further down grades, get busy building those bomb shelters,; cuz nuclear hell by US will break loose.

  • What was it Trump said?
    “I’ll just print more.”