Here’s a brilliant piece of marketing from upstart credit ratings firm Dagong.
In their first report they’ve rated American government bonds as more risky (in terms of default risk) than those of China, Switzerland, and Australia, not to mention nine other countries around the world.
The report comes amid complaints by Beijing that Western rating agencies fail to give China full credit for its economic strength, boosting borrowing costs – a criticism echoed by some foreign analysts. At June’s G20 summit in Toronto, President Hu Jintao called for the creation of a more accurate system.
Dagong, founded in 1994 to rate Chinese corporate debt, says it is privately owned and pledges to make its judgments impartially.
Dagong’s chairman, Guan Jianzhong, said the current Western-led rating system is to blame for the global crisis and Europe’s debt woes. He said it “provides the wrong credit-rating information” and fails to reflect changing conditions.
“Dagong wants to make realistic and fair ratings,” he said.
This is good marketing from two angles. 1) It gets them a lot of attention based on shock factor and 2) they’ve positioned themselves as a ‘non-Western’ perspective, which could be appealing to many non-Western clients, or Western ones who might be hooked by the ‘anti-establishment’ branding.
Thing is, while we’ve frequently questioned the safety of U.S. debt as an investment, Dagong’s probably gone a tad overboard, especially with China described as a less risky government to lend money to.
This is because credit ratings aren’t just about financial statistics such as debt/GDP, budget deficits, or GDP growth. They are also about factors such as the political stability of a country, the willingness of a country to pay debts, and the established trust of global investors in a country.
We have a substantial appreciation for China and believe it has a bright future, but we shouldn’t get carried away by just the last two decades of performance. In the grand scheme of things, it wasn’t too long ago that China was both a complete mess politically and economically, whereas the U.S. has established itself as a stable country (over the long-term, despite periods of turmoil of course) for a good century or more.
America has had its problems but nothing like what happened in China just 60 years ago, and let’s be frank China still hasn’t settled into the stable political and social situation most developed nations have. China could easily experience a violent political revolution in the future, where old government obligations could be up in the air, whereas most major developed countries are probably past this political stage.
So while U.S. government bonds are probably more risky than what many in the investment establishment think (we’re no fan of buying treasuries right now), and America has a lot of huge problems, they’re still less risky than China’s, and it’s because of established credibility (despite how much many like to trash the U.S.’s lost credibility) and America’s far lower chance of coup d’etat or violent revolution.
Dagong is making a smart move trashing America’s rating, and it’s productive to think about their call, but if there were a world war, we doubt global investors’ would be sending their money into China as a safe haven. Maybe Switzerland, surely gold, and arguably Australia… but surely not China.