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China rating agency blames U.S. for "credit war"

Fri Jan 28, 5:31 am ET

BEIJING (Reuters) The United States is effectively printing cheap dollars as

it implements an ultra-loose policy to spur its flagging economy, setting the

stage for "a world credit war," a Chinese rating agency said on Friday.

The Beijing-based Dagong Global Credit Rating, a relative newcomer in the

sovereign debt rating realm, said in its 2011 Sovereign Credit Risk Outlook

that quantitative easing by the U.S. Federal Reserve has "eroded the legitimacy

of the global monetary system that takes the dollar as the key reserve

currency."

The policy easing was also "bringing the U.S. dollar's credit-worthiness to a

vulnerable position," it said.

Dagong, which has been rating Chinese corporate bonds since 1994, created a

splash by rating the United States at double-A, below China's AA-plus, in July

2010.

It downgraded the U.S. sovereign credit rating last November, following the

Fed's decision to pump more dollars into the U.S. economy.

Although Dagong's statement does not fully represent Beijing's view, it was in

line with the government's unhappiness with the U.S. policy easing, which has

been blamed by Chinese officials for fuelling global inflation risks.

As China's $2.85 trillion foreign exchange reserves are mainly denominated in

U.S. dollars, Chinese Premier Wen Jiabao had publicly voiced concerns of the

assets.

President Hu Jintao told a recent G20 summit at Seoul that China wanted "an

international reserve currency system with stable value, rule-based issuance

and manageable supply."

But Dagong said in the English-language report that the United States is trying

to "haircut" its creditors by permitting a weakening currency.

"The behavior that the United States ignores international creditors'

legitimate interests indicates a dramatic decline of the country's willingness

to repay the debt," Dagong said.

In defining the "credit war," Dagong said "it aims at encroach on other

countries' interests through continuous depreciating the actual value of the

currency; and it arouses all the countries in the world to take various credit

resources as a financial weapon to safeguard the national interests."

It added that the capital flows into emerging economics stemmed from cheap

dollar is "a destructive factor to the healthy economic development in

different countries."

For full version of Dagong's report, see http://www.dagongcredit.com/dagongweb/

english/pr/show.php?id=86&

table=web_e_zxzx

PORTUGAL AND SPAIN

Dagong added the sovereign debt crisis in the euro zone countries would

intensify in 2011 and it may downgrade of sovereign credit ratings on Portugal

and Spain.

"Countries, such as Portugal and Spain, will have to ask for bailouts in 2011,"

it said.

Earlier this month, China reaffirmed a commitment to buying Spanish bonds while

newspapers in December said Beijing was ready to buy Portuguese debt to help it

through Europe's spreading debt crisis.

Echoing the International Monetary Fund and western rating agencies, Dagong

also warned that the governments in the United States, Japan and Germany will

face higher pressure on debt repayment in case of inflation, economic downturns

or if investors start dumping their bonds. It did not elaborate.

Ratings agency Standard & Poor's cut Japan's long-term debt rating on Thursday

for the first time since 2002, and hours later Moody's Investors Service warned

the risk of the United States losing its top AAA rating, although small, was

rising.

The International Monetary Fund said the G7's two biggest economies needed to

spell out credible deficit-cutting plans before the markets lose patience and

dump their bonds.

(Reporting by Zhou Xin and Kevin Yao; Editing by Kim Coghill)