Tags: China | US | Doesnt | Intend | Repay | Debt | Weakening

China: US Doesn't Intend to Repay Debt by Weakening Dollar

Tuesday, 09 Nov 2010 03:54 PM

China ramped up its rhetoric against the United States Tuesday, with a Chinese credit ratings agency accusing the United States of the intent not to repay its debt by deliberately weakening its currency.

The China and the United States have exchanged words in recent years about the strength of the Chinese currency against the U.S. dollar and the U.S. trade deficit with China. The United States relies heavily on capital inflows to finance its deficit.

The Dagong Global Credit Rating Co. Ltd., in an English language release from on its website, cut the United States' local and foreign currency long-term sovereign credit rating to A-plus from AA to reflect what it called the United States' "deteriorating debt repayment capability and drastic decline of the government's intention of debt repayment."

The move comes just a few days ahead of a Group of 20 summit in Seoul where currency exchange rates and their affect on global trade are expected to be a key issue.

The U.S. Federal Reserve's launch at its policy meeting last week of a controversial new program to buy $600 billion more in government bonds in an attempt to breathe new life into a struggling U.S. economy has also drawn strong criticism ahead of the G20 meeting.

Dagong's "analysis is not complete but some of the points they raise are true," said Herbert Kaufman, professor emeritus of the W.P. Carey School of Business at Arizona State University. "It is not clear the policy tools used will be sufficient" to stimulate the U.S. economy.

Kaufman emphasized, however, that Dagong's analysis failed to take into account the United States' historical ability and responsibility to repay debt.

"Either they don't appreciate it or they don't want to appreciate it," he said.

Kaufman, a former economist with Fannie Mae in Washington, said he was aware of Dagong's existence but not familiar with it. He also cautioned about reading too much into the literal English translation on the agency's website and said it should be read in the context of the source of the opinion.

According to its website, Dagong Global Credit Rating Co Ltd is a specialized credit rating and risk analysis research institution founded in 1994 upon the joint approval of People's Bank of China and the former State Economic & Trade Commission, People's Republic of China.

"The Chinese government has interest on opinions on topics like this which are expressed by ostensibly private institutions," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "So it's hard to believe such an opinion does not reflect at least partial approval by the Chinese government."

Trevisani said he had never heard of Dagong before being contacted by Reuters.

U.S. CREDIT CRISIS BLAME

Dagong blamed the current U.S. credit crisis on "the long-standing accumulation of contradictions in its economic system."

It said a potential world crisis resulting from U.S. dollar depreciation will increase the uncertainty of the U.S. economic recovery.

"Under the circumstances that none of the economic factors influencing the U.S. economy has turned better explicitly it is possible that the U.S. will continue to expand the use of its loose monetary policy, damaging the interests of its creditors," Dagong said.

The ratings agency suggested the United States may face unpredictable risks in solvency in the coming one to two years and assigned a negative outlook on both local and foreign currency sovereign credit ratings of the United States.

The United States is top rated Aaa by Moody’s and AAA by Standard & Poor's and Fitch.

To be sure, China has a lot to lose if its accusation proves correct.
China, the biggest buyer of U.S. Treasury debt, raised its total holdings by $21.7 billion to $868.4 billion in August, according to U.S. Treasury Department data.

Though the composition of China's foreign exchange reserves is unknown, analysts believe some two-thirds are held in U.S. dollars.

"Since they are a large holder of U.S. Treasurys it is not to their advantage to downgrade," said the W. P. Carey School of Business's Kaufman.

© 2017 Thomson/Reuters. All rights reserved.

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China ramped up its rhetoric against the United States Tuesday, with a Chinese credit ratings agency accusing the United States of the intent not to repay its debt by deliberately weakening its currency. The China and the United States have exchanged words in recent years...
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