A barely known Chinese rating’s agency is crying out for a more ‘realistic and fairer’ international credit risk system.
Right now, the international risk system is dominated by three main companies: Moody’s, Standard & Poors and Fitch.
All three of these companies, didn’t see the global financial crisis coming, or the European debt crisis coming. And it’s precisely these events that Dagong International is using to its advantage.
But you can’t help but feel that this company has its own agenda.
Firstly, this Beijing based company claims to be completely independent of government interference as it’s privately owned. However the company made its most recent announcement at the Communists Party’s favourite propaganda machine, the head office of Xinhua News Agency.
And before we even get to the comments Dagong has made regarding the status of American debt, let’s not forget that China has recently invested more than USD$900 billion (AUD $1.02 trillion) in US Treasury debt.
So at the very least, you can say this company has a vested interest in promoting China.
This is where it gets interesting.
You see, Dagong has said that because of the strong hold that the three credit rating agencies have over the international market, China has been rated unfairly. In fact the company feels that they isn’t being given due credit for the strength of the economy and relatively low level of debt.
Some experts have agreed that the Western nations tend to judge developing nations unfairly.
And for the moment, we won’t even suggest that China is cooking their books, because this new agency does have a couple of valid points.
Shockingly, this new ratings agency has said that American debt deserves to be rated worse than Chinese debt. Which is at odds with the three major rating companies because they all believe that American debt is perfectly safe.
Actually, all three of the ratings power houses call it the ‘world’s safest’ debt.
Yep, this is the exact same three companies that gave mortgage-backed investments a high rating. And yes, the exact same mortgage-backed investments that have the States in the sticky debt-laden bed they now lay in.
It’s refreshing to another point of view on the matter. Something the rating’s industry desperately needs.
Yet, Dagong is only pointing out the obvious when it comes to the current financial problems in the US. The main reason the company rates America lower than China is because of the slow growth and high debt. As Dagong explains it, increasing borrowing costs and the risk of default for America is extremely high.
But here’s thing. We are really only just beginning to understand the debt problems unfolding in America. The all important ‘economic indicators’ are suggesting that a double-dip recession is looming.
This information isn’t new, but for months now everyone has chosen to believe that the recovery will happen. Because let’s be honest, who wants to think that things could get any worse for America?
So whose advice do we trust more? The powerful agencies that ‘own’ the ratings space and ‘missed’ all of the events that lead up to the GFC? Or a company that clearly has its own interests to look after?
Right now, we’d be suggesting neither. But it’s refreshing to finally have another opinion in the international credit ratings business, even if the company will have to hide their communist leanings.
Shae Smith
Assistant Editor
For Money Morning Australia
{ 26 comments }
← Previous Comments
Next Comments →
cb
thanks for your reply/comments on how you see the Ozz property debacle/bubble…
i cannot really fault your reasoning as such, except perhaps to ask whether you dont think you’re overanalysing the situation a bit perhaps?
one question that comes to mind is howcome similar housing markets all over the world have ‘corrected’ or popped as some may say?
Is it truly a case where the Ozz property market just has more variables at play and can therefore maintain ‘unsustainable’ prices indefinately?
or is it perhaps simply that us Australians are just more intellectually challenged than most and so are willing to (stupidly) pay far more for housing – and everthing else apparently than everybody else?
Abby – Those are all very good questions, and I do not have all the answers, to be sure. The very first thing, though, is this: even though prices in an asset category may be at record levels, there simply no telling as to which point, and why exactly, a serious correction kicks in. If you look at a historical chart of virtually anything, with overbought/oversold indicator(s) clicked on, the very first thing that will jump at you is the crazy lengths of time that prices can stay overbought and oversold at a stretch. It is enough to drive you batty just trying to identify some sort of pattern that would reliably predict a reversal in either direction. There are lots of patterns and some look promising, to be sure. But risking anything substantial on them on a consistent basis would be nothing if not worse than doing the same on Two Up. That’s my experience, anyhow.
Another thing, and this one specifically about the housing market, the reality is that we are not the only ones sitting on record prices. Canada and New Zealand, for example, have not corrected yet either. We know that Japan and the US have, but even the UK seems to have stabilised at less than half way down to where otherwise realistic expectations would have us believe they should be. Anyhow, the point is that we are not alone by a country mile, and the most instructive thing would be to identify a common pattern between those that buckled under, and those that have not.
I would find an open minded examination of the similarities and the most plausible differences between the two classes, i.e., the fallen and the hangers on, much more productive and instructive than an uber-bearish assumption that it is only a matter of time before the rest also end up in the drink. The common mantra seems to be that nobody can defy gravity forever, but the analogy itself questions the thesis, because there are things that do defy gravity, so we would be wiser to enquire, than to assume.
And, finally, but following on from the previous point, a promising common feature of those of us that have not crashed, in contrast to those that have, might be that for the time being, resource driven economies are able to maintain leverage and borrowings against their export earnings, current and expected. In a credit dependent and driven economy, the turning off of the credit taps means death, and those have not been turned off for us, because creditors still consider it a good idea to be exposed and capture a share of resource cashflows, and they can only do that by lending into these economies, so that they can collect their share of those cash flows through interest.
I haven’t thought through this idea properly, but it does seem like a promising starting point. For this much we know: if credit is turned off for whatever reason, into the drink we go. Stimulus can keep us going for a while, and potentially for quite a while, but sooner or later the economy needs to earn its keep, plus have some to spare, or the collapse is going to be even worse for the delay.
aaah CB … still defending our indefensible property market?
cb…allow me to put forward a simple case, in fewer words.
Unemployment (or lack thereof) is the reason why Australian property has not fallen / crashed…
Wolf – you are correct, of course. My explanation sought to go one level deeper, seeking the reasons why the job market, and hence the housing market and credit availability have held up. None of these hang high in the air by nature, but are subject to serious gravitational pull, which must be overcome and counteracted by some force that keeps them going. In other words, where does the money come from to keep people employed, and the banks lending, instead of the Keenly predicted wholesale and across the board deleveraging?
The only answer I can think of is the current and expected future resources cashflow. Against this income and expectation, if you will, investors have been willing to pour billions and billions into our economy, keeping people in jobs and the banks being able to source credit, as well as continue to find credit worthy borrowers willing to borrow against property.
Should that expecations, god forbid, change, investors will cancel projects and pull out their cash, banks will not be able to borrow, people will be laid off and could not borrow anymore even if the banks had money to lend, etc., etc., all the way into the drink, as in Japan and America, exactly the way predicted by Keen.
Agreed cb, I think that as long as the general public see the sky as blue, they will continue to mine…
CB @ 12:
i agree with your logic.
But it all hangs on the IF …
and on employment…
We all know that unemployment stats are grossly under reported – kinda like inflations stats – all to make the government look a lot better than it deserves.
But you’re correct of course – currently our unemployment/underemployment – at whatever levels they truly are – are still able to underpin our current property prices.
but any changes to levels of employment and to interest rates – in the correct combination – will ignite one hellova stink bomb!!
Wolf, Sandra – Yes, and therein lies the eternal uncertainty regarding the future. Just because we have a credible explanation for things holding up, the very explanation highlights just how fragile and vulnerable the whole system is. We are kind of stuck at dangerous levels of leverage as a national economy. As long as we have a decent income stream from productive enterprises, we can stay leveraged because we can keep servicing our debts, but the whole edifice unwinds if we try to deleverage too fast, or if we are forced to deleverage because credit dries up.
This is where Keen’s contribution is valuable, by allowing us to be awake to the dangers. Alas, the dangers remain, and we continue to live in the shadow of a disaster that is just waiting to happen, which is but a consequence of a sick monetary system, which by design is structured to benefit and feed the speculators and the parasites at the expense of the savers and the productive.
Talking of which, the solution would also be simple enough. As Keen and others have recommended, we need to declare a Jubelee for excessive debt. This would mean wholesale debt forgiveness at every level. Much of the debt has been created from thin air anyway, by people and banks who have a licence to print money, so debt forgiveness would not need to come at the expense of savers, as such, who would need not lose their capital. It would simply mean that those currently benefitting from the exorbitant flows of interest payments on the phantom monies they created would no longer receive those interest payments. But because the very interests are in charge of the entire system, the only solution to the GFC that would actually work will not be enacted. After all, things are going to plan, for them.
bb – I have just caught up with that SMH article on China that you referenced. What comes to mind is Marc Faber’s warnings that we are all doomed, because the culmination of the quiet insanity we now have on a global scale is going to be war. And with nuclear arsenals at the disposal of all the key players, WW3 is going to be no picnic.
cb
thanks for all your well thought out and patient responses to my questions.
i believe we are now pretty much on the same page – at least in terms of reasoning out the factors which are at play in (perilously) supporting our property market.
Sandra – i liked your summary of the two factors which will ultimately determine the plight of our property market. except i see it more as an atom bomb than a giant stinkbomb which would ultimately explode in the event of interest rates rising and unemployment rising sufficiently!
← Previous Comments
Next Comments →
Comments on this entry are closed.