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China’s Dagong Global Credit Rating Co is infamous for claiming the United States has defaulted on its debt and handing out dismal grades to Western countries. Today, however, they’re coming under fire for being too liberal with their AAA ratings, China Daily reports.Since August 2010, the agency has handed out 156 of AAAs. Meanwhile, its director said earlier this week “the world will be in great danger” if it keeps trusting U.S. ratings agencies.
Of course, Dagong says criticism over its AAA rating and/or methodology is “inappropriate,” citing the fact that it has only given AAA’s to 11.47% of the bond issuers that it rates. It added that bond issuers are given separate ratings for each of their individual products, making rating more complicated than critics are implying.
But then there’s that Railway AAA, among others, throwing a wrench in their whole argument. The criticism suggests that it isn’t just how many AAAs Dagong is handing out, it’s to whom they’re being handed.
Take local government debt, for example. Earlier this week new numbers came in showing that local governments carry an average debt ratio of 52.25%. Only two provinces came in below that average, and the most indebted province, Hainan, has a debt ratio of 93.18%. At the end of 2010, local governments were 10.7 trillion yuan in debt.
And this probably isn’t the full picture. The Chinese central government basically just repackaged some of this local government debt as corporate debt to make local government balance sheets more attractive. Now they’re drafting plans to make it possible for local governments to issue more bonds — bonds that tend to get lost in China’s messy bond market.