China’s Dagong Credit Agency Downgrades U.S. to A+

The reason: QE. The downgrade for the U.S. is to A+ from AA, with a negative outlook
because of quantitative easing, according to Xinhua. According to the ratings agency, quantitative easing will further depreciate the U.S. dollar and is therefore not in the interests of America’s creditors.

(document now embedded below)

Dagong Credit Ratings Agency Downgrade of US to A+

Andy Lees write in a note in this regard:

Chinese rating agency has downgraded the US economy – (see attached) – due to the QE infering it has little interest in repaying its debt. Does China’s ministry of finance need a AAA rating to hold Treasuries and dollars? How can the government justify to the public that they are holding so many dollars when by their own analysis the US has little intention of repaying? Perhaps we can see China reduce its dollar purchases? Not a chance. They will continue to recycle some of their new dollar earnings into commodities leaving the private sector holding the dollars, but even this diversification will be minimal because they simply cannot afford to let the dollar fall; the Premier said only a few weeks ago if they were to do so then there is no way domestic consumption could make up for exports, so a rapid rise in the Renminbi would destroy their export industry resulting in huge layoffs and according to the premier social unrest. As details of the latest 5 year plan leak out it seems to focus on heavy capital spending and infrastructure as well as sucking in USD420bn of FDI, all of which seems likely to exacerbate the imbalances rather than boosting consumption.

This is all pure politics because the G-20 is coming. This time, rather than play the mini-devaluation game that China played last go round, they are taking a more aggressive stance in order to frame the U.S. as a hypocritical trade manipulator. Recent comments from Germany and Brazil also go to this.

As for China’s attempts to move away from the dollar, much of this has to do with increasing domestic consumption demand, something they are clearly attempting to do.  Caijing says get ready for China’s development switch:

The latest five-year plan exposes tension between old and new growth models, but change cannot be stopped

China’s recently released a draft plan for the next five years is nothing short of full-blown strategy for transforming the nation’s development model. In a first for the government’s planning process, the 12th Five-Year Plan for the 2011-2015 period outlines specific steps designed to raise consumption levels and make China a leading consumer market.

One message is clear: The Chinese government wants to foster a national transformation from "world’s factory" to "world’s market."

Can China effectively change its development model? The answer will determine whether the nation can indeed rise to the top among global consumer markets and, indeed, whether the next five-year plan works.

China cannot afford to delay the scheduled change from an "extensive" resource- and export-driven growth model to an "intensive" model that’s driven by technological advancement and efficiency.

The ills of extensive economic growth in China – results of the nation’s planned economy – are well-known. Plans to switch models have been on the agenda for years. The 9th Five-Year Plan passed by the National People’s Congress in 1996 said a basic task would be to switch from extensive to an intensive growth model. The 17th National Congress of the Communist Party in 2007 stressed the need to accelerate transformation, thus expanding the effort to transition from economic growth to comprehensive development.

Despite these good intentions, progress has been disappointing, and today the extensive growth model remains fundamentally unchanged. Its most striking feature is still an over-reliance on investment. And although domestic consumption has registered strong growth, GDP weighting has failed to improve significantly.

Export-oriented trades have created tens of millions of jobs and earned China the title "world’s factory." But the country has paid a heavy price for this fame in the form of worsening "hidden" inflation, labor disputes, environmental degradation and international trade conflicts. And although this model of development is clearly unsustainable and on its last legs, some argue that it should continue contributing to the economy.

There is a struggle going on within China as to how quickly to move toward this internal consumption-oriented growth dynamic. Clearly, the trade tension with the U.S. is pushing the Chinese more quickly in that direction. Nevertheless, it will be a long time before China decouples from the US as it will be export-dependent for some time to come. If the developed economies cannot grow more quickly soon, the trade tension will come to a head before China can make that transition.