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China's Dagong Sees Lower U.s. Rating, No China Local Debt Default

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The United States may see further sovereign rating downgrades if it fails to improve its debt service capability, although a near-term cut looks unlikely, the head of Chinese credit rating firm Dagong said.

Beijing-based Dagong Global Credit Rating Co grabbed the media spotlight in October by cutting the U.S. rating by one notch to A-minus from A, despite a deal by Congress to raise the government's borrowing ceiling.

"Our rating could be effective for some time. We won't cut the rating at will," Guan Jianzhong, chairman of Beijing-based Dagong, told Reuters in an interview.

"We are very worried about the U.S. economy. The Federal government hasn't unveiled any strategic measures to fundamentally resolve the (debt) problem."



In a rare move earlier this year, Dagong downgraded bonds issued by three financing vehicles wholly owned by Chinese cities in provinces of Jilin, Hubei and Jiangxi.

"That was a warning sign on local debt. Their debt payment ability declined and we saw no sign of any quick recovery," he said, without saying whether more of such cuts are in the pipeline.

Guan said the company had paid a price for breaking ranks with local rivals as it lost some customers in a highly competitive market.

Most local government financing firms are set up by local governments to borrow funds to finance local investment projects. Domestic corporate debt defaults are rare with banks or the government stepping in to cover potential losses if a firm gets into trouble.

Guan said the chances of debt defaults by Chinese provinces and cities remain slim as Beijing may flex its fiscal muscle to bail them out, despite growing market fears that slower economic growth could push some to the brink.

"A default could be disastrous. Other local governments may help and the central government will not allow it to default."

So China will simply cover up the problem and bail everyone out. What could possible go wrong with that sort of moral hazard...

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