China's outrage over US downgrade fails to convince
Friday's downgrade of the United States' credit rating by Standard & Poor's has provoked a storm of reaction around the world, none of it very convincing.
For one thing, you have to wonder exactly when everyone started taking ratings agencies so seriously again. For the last four years, ever since the outbreak of the credit crisis, governments, investors and financial commentators have all spent a good deal of time castigating S&P and the rest for the uselessness of their analysis and the worthlessness of their ratings.
Now, suddenly, everyone is treating their assessments as gospel and their ratings as earth-shatteringly important, all because S&P downgraded the US from 'extremely strong' to 'very strong'. Yet nothing of any consequence actually changed on Friday. After all, the political battles over how best to cut the US budget deficit are hardly news, and the downgrade makes no concrete difference to the status of the US government as a borrower.
As former junk-bond king Michael Milken told a Hong Kong audience a couple of years ago, investors who rely on ratings agencies rather than doing their own analysis deserve to lose money. 'Ratings are not credit,' he said. 'You can't invest based on ratings.'
But of all the reactions to last week's downgrade, none rang more hollow than the Xinhua editorial published on Saturday.
In it, Beijing's official news agency slammed what it described as the US government's 'addiction to debts'.
'The US government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,' Xinhua thundered. Following the downgrade, Washington would no longer be able to 'rely on the deep pockets of major surplus countries to make up for its perennial deficits.'
Of course, the major surplus country that Xinhua's leader writer had in mind is China, which according to Monitor's estimate is sitting on about US$1.4 trillion in US Treasury debt. As a result, Beijing has an understandable interest in the credit-worthiness of the US government. Even so, the shrill criticisms of the Xinhua editorial fail to stand up to a closer examination.
For a start, it is far from clear that the US is any more addicted to public debt than any of the world's other major economies.
Although the headline figure for US Treasury debt has just breached its former US$14.3 trillion ceiling, it is worth remembering that about a third of that debt is owned by other agencies of the US government.
Strip that out, and as the first chart shows, Washington's net debt comes to 65 per cent of US gross domestic product. That's high, and on current trends it's set to go higher. But in international terms a debt-to-GDP ratio of 65 per cent is actually quite modest. It is lower than the ratios of Germany, France, Britain, Canada and Singapore, all of which boast AAA ratings.
In fact, according to many analysts, 65 per cent is lower even than China's government debt-to-GDP level, once you factor in the unsupportable debts of local governments and state policy banks.
If Xinhua's charge of addiction is unconvincing, so is its call for 'international supervision over the issue of US dollars'.
Such a supervisory mechanism already exists. It's called the bond market. If investors really doubted Washington's credit standing, they would demand a higher yield on their holdings of US government bonds. Yet as the second chart shows, yields have seldom been lower than they are now.
Part of the reason is that China itself continues to buy US Treasury debt in vast quantities.
If Beijing were as concerned as Xinhua makes out, it could simply stop buying. But the reason Beijing buys so much Treasury debt is that it continues to accumulate tens of billions of US dollars each month.
Stopping that build-up would mean ceasing to intervene in the foreign exchange market to hold down the yuan. And if Beijing stopped, the yuan would soar.
That, of course, is what Washington has been demanding for years, and what Beijing has long refused to do.
As a result, Chinese protests at Friday's downgrade simply don't ring true. Beijing has been complicit all along in the build-up of US debt. It really can't complain now the US has been downgraded.