Bond Outlook by bridport & cie, November 10th 2010

The Chinese have moved from stubborn defence, to outright attack, on the macro-economic front. “Dagong”, the Chinese agency created in 1994 for rating domestic entities, began to rate international sovereign issues in July 2010. Little notice was taken of them at the time, but their recent downgrading of US Treasury debt from AA (watch list negative) to A (watch list negative) can be seen as a definitive first strike. The accompanying ten-page report is a blistering attack on the USA for its money printing, devaluation of the USD, building its economy on debt expansion, deliberately exporting its debt to foreign creditors, refusal to mitigate expenditure and, perhaps most damning of all, its “global hegemonic strategy”.

The Dagong attack almost certainly has the full approval of the Chinese Government, notwithstanding its independence of government ownership, and may represent a declaration of economic war. They come to the conclusion that the Rest of the World will soon (even very soon) no longer tolerate being paid in a devaluing Dollar and will reduce the flow of recycled USD into the American economy.