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It Is No Longer Safe To Invest In US

by Der Spiegel - Open-Publishing - Wednesday 17 August 2011

Economy-budget USA

The head of state-owned Chinese rating agency Dagong, Guan Jianzhong, 57, speaks to SPIEGEL about China’s economic model, why he believes the rating system used by the Big Three is a threat to the world and the twilight of Western dominance.

SPIEGEL: You recently said that it would be a “catastrophe” if an American rating agency downgraded the United States’ credit rating. Now that Standard and Poor’s has taken that step, is the situation as bad as you imagined?

Guan: This rating on the US credit crisis has a significant influence on the world. China is the largest debt holder of the United States, and the downgrade will primarily damage the value of the US dollar assets and bonds held by China. Second, it will influence China’s export of commodities to the United States in the future. More importantly, it will lead to the deterioration of global macroeconomics for both developed debtor economies and emerging creditors.

SPIEGEL: Will China invest less in US bonds from now on?

Guan: I personally think it’s unsafe to invest in US bonds. It is too risky. But the Chinese government might have considerations other than just economic risk. In terms of pure investment, however, it is not a wise decision any longer.

SPIEGEL: Both the US and Europe are struggling with a massive debt crisis. Is this the end of Western dominance?

Guan: The EU and the United States both have this model of borrowing money to boost their economic development. But they borrow money from the future, they mortgage a virtual fortune that they may — or may not — earn for their creditworthiness and their current consumption. This has been their model since World War II, but this model ended in the financial crisis of 2008. Continuously creating demand for credit to enlarge capital and cash flow has used up their creditworthiness. This means the model of economic development in developed Western capitalist countries has ended. It leads to another question: Should the government keep borrowing money to support its citizens in consuming much more and maintain high social standards? I think the answer is no.

SPIEGEL: Do you think China’s model is better?

Guan: China is characterized by a real economy, unlike like the United States, which mainly depends on the financial industry. Though China’s financial industry is developing, China relies on its real economy to create value and money. If we can draw some lessons from the Western experience, we should insist on letting real economy create value and money while discouraging the Chinese from borrowing too much money.

SPIEGEL: Your agency downgraded the United States before Standard and Poor’s did so. Why?

Guan: We use a different rating system. When we evaluate sovereign creditworthiness for the United States, we consider the potential outlook of its economic development — the driving force to boost its economy — along with its revenue and expenditures. The US has poor performance in all three criteria. Besides, it needs to borrow a lot of money to keep running the country, and without improving the above three criteria, its ability to repay debts will worsen further.

SPIEGEL: Were American rating agencies unable to look at the situation from the same sober perspective?

Guan: My major criticism is that they do not evaluate and rate a country according to what actually causes risks to creditworthiness. Instead, they use ideology and values. If we keep using this rating system, the whole world will be in great danger.

SPIEGEL: How does Dagong rate China?

Guan: China has good all-around performance. It is growing in every field and its debts are so limited that the government has the ability to repay them.

Interview conducted by Sandra Schulz