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Kneepads In Tow, Moody's Responds To Dagong's Downgrade Of The US By Upgrading China

Tyler Durden's picture


Not even 48 hours after Dagong dared to tell the truth about America's sad state of affairs (again) and downgraded the developed world's most insolvent nation for the second time in half a year, Moody's has confirmed that in the creditor-debtor relationship, it is the latter who wears the kneepads. As of a few hours ago, Moody's has upgraded China from A1 to Aa3. The reason cited: "we need China to keep buying our debt" - well, not really, we have the Fed to do that, and in 2 weeks, China's top holding of US paper will be a distant memory. But the last thing the US needs is to piss off the one country whose security dump could be too big even for the Fed to monetize. Ergo: throw Moody's in the wolves' den. After all nobody respects, cares or in any way pretends to even listen to the disgraced and Wells Noticed rating agency (speaking of which, whatever happened to that Wells Notice?).  

From a groveling Moody's:

Moody's Investors Service has today upgraded the Chinese government's bond rating to Aa3 from A1 and is maintaining its positive outlook.

The action raises the government's foreign and local currency bond ratings to Aa3 from A1, China's country ceilings for foreign and local currency bank deposits to Aa3 from A1, and the ceilings for foreign and local currency bonds to Aa3 from A1. The short-term foreign currency rating remains at P-1 and is therefore unaffected.

The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country.


The main reasons for the decision are:

1. The resilient performance of the Chinese economy following the onset of the global financial crisis, and expectations of continued strong growth and macroeconomic stability over the medium term.

2. The government's quick, determined and effective stimulus program, the unwinding of which has begun.

3. The lack of erosion in central government financial credit fundamentals, and the likely containment and effective management of prospective, contingent losses arising from the extraordinary credit expansion in 2009.

4. The exceptional strength of the external payments position which provides a substantial buffer to global financial market turbulence and that China's capital controls will help stem de-stabilizing capital inflows.

5. The expectation that trade and currency regime tensions will be constructively managed between China and the US.

Moody's signaled its action today by changing the outlook on China's ratings outlook to positive from stable on November 9, 2009 and by placing the ratings on review for possible upgrade on October 8, 2010.

These actions were justified by events over the course of the past year, during which China maintained a strong, but stable macroeconomic performance.

"In particular, we premised our action on the ability of the Chinese authorities to protect systemic stability from the underlying threats arising from the extraordinary credit expansion evident in 2009," says Tom Byrne, a Moody's Senior Vice President.

"The record of the past year demonstrates that China's policy response to the 2008 crisis has been effective. Real GDP growth initially rebounded rapidly in response to the stimulus measures, and is moderating to a more sustainable rate of growth, which seems likely to be around 9-10 percent this year, and perhaps 8-9 percent in 2011," says Byrne. Although inflation is becoming a challenge, it currently remains moderate, and the PBOC has taken tightening measures in normalizing monetary policy.

The re-balancing of the Chinese economy emphasizing domestic consumption and a somewhat tempered rate of economic growth, if sustained, will also help ensure long-run macroeconomic stability. Indeed, since last year, private consumption has been rising even faster than nominal GDP growth. Moody's expects that trend to intensify with a more rapid rise in wages in the future.

The shift in growth policy is a plank of the upcoming 12th Five-Year Plan, and we expect that the next generation of leadership, when it assumes power in 2012, will follow this economic script. We also expect another smooth, peaceful transfer of power, as took place in 2002 when Mr. Hu Jintao was selected as the Communist Party General Secretary.

The orchestration of an extraordinary economic stimulus program has so far only modestly affected government finances. The budget deficit will likely be contained within 3% of GDP this year and next. Robust revenue growth will likely eclipse that of nominal GDP growth, raising further the ratio of revenues to GDP.

Moreover, direct government debt will likely remain below or around 20% of GDP this year and next. Contingent liabilities on the central government's balance sheet -- arising from the credit surge in 2009 and sharp rises in financing vehicles associated with local-level governments -- are evidently likely to be manageable, based on information currently available.

Government financial strength is bolstered by an ability to finance budget deficits readily and at low cost from the country's large pool of national savings. Unlike the more heavily indebted governments in the Aa-rating range, China does not rely on external financing. Rollover, funding or deleveraging risks are accordingly reduced should the global market appetite for sovereign risk deteriorate.

In addition, with net international financial assets greater than 50% of GDP -- bolstered by about $2.7 trillion in official foreign exchange holdings -- only a handful of highly rated advanced industrial economies, such as Norway, Switzerland, Japan, Hong Kong and Singapore, have a stronger international investment position than China.


Although Moody's has concerns over the intrinsic, stand-alone strength of China's banking system, we nonetheless recognize that its largest banks have not been materially damaged by the global crisis. Therefore, the dominant banks in the system will not likely pose any sizable contingent liability risk to the government's balance sheet.

Furthermore, we expect that future credit losses -- arising from the surge in lending in 2009, from exposures to the property market, from risky loans to local government financing vehicles, and from off-balance sheet operations in the "shadow" banking system -- will be mostly absorbed by the banks themselves, either from capital, or from future earnings.

However, transparency is still lacking on the extent of such potential losses. While uncertainty persists about the size and soundness of off-balance sheet local government financing operations in particular, we also believe that the central government has ample fiscal headroom to absorb future losses.

Domestic risks would also include an inability of the policy framework to rebalance economic growth, while ensuring that trend growth is maintained at a sufficient pace to ensure employment creation and social stability.

Externals risks to trade relations may be the most threatening over the near term, but conciliatory statements made by Vice Finance Minister Wang Jun and US Treasury Secretary Timothy Geithner in the run-up to the G20 summit in Seoul suggest that tensions over China's exchange rate policy and the US Fed's monetary policy may not escalate out of control. Nonetheless, domestic political pressures will likely keep such issues on the front burner.

In addition, it is noteworthy that China is becoming more of a stakeholder in the international system by assuming a larger role in the IMF, and where its voting rights will rank third, behind only the US and Japan. This also bodes well for a constructive approach to policy differences between China and the US.


These would involve:

1. While to some degree concerns have been allayed through recent discussions with Chinese authorities, greater assurance that local government off-budget financial operations have been contained, and are manageable without imposing a significant burden on the central government's balance sheet and its financing costs would be credit positive.

2. The continued likelihood of success in macro-prudential regulation of the banking sector and property sector to ensure systemic stability without the need for extraordinary support from the government.

3. Signs of success in the policy shift signaled in the recently concluded 5th Plenum of the 17th CPC Central Committee for a rebalancing of China's growth model more towards one driven by consumption, rather than predominantly driven by investment and exports. This would also help fend off external, protectionist pressures.


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Thu, 11/11/2010 - 01:34 | Link to Comment trav7777
trav7777's picture

kneepads, bitchez

Thu, 11/11/2010 - 01:47 | Link to Comment metastar
metastar's picture

and a little liquidity as lube please.

Thu, 11/11/2010 - 08:13 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture


Not even 48 hours after Dagong dared to tell the truth about America's sad state of affairs [...]

Wow, so you are really taking China's rating agency (controlled by communist party officials) at face value when it comes to the state of the US economy.

China, which has an impeccable track record of telling the truth, and which has absolutely zero interest in US debt. (Except maybe a huge trade surplus plus a trillion dollars or so in US Treasuries - so some deflation in the US would come real nice! Not to talk that China is the global competitor of the US, so deflation in the US means growth in China. But China and the US are friends, right?)

Whom will you consult next on oil drilling safety, the BP board?

Whom will you ask about safe and sound foreclosure legal practices, Bank of America?

Whom will you ask about the nice, positive effects of fiscal austerity, Ireland?

(I have this fine bridge to sell to you as well.)

Thu, 11/11/2010 - 09:30 | Link to Comment tmosley
tmosley's picture

I guess you missed the story last night where he savaged the inflation numbers coming out of China as totally fake.

This isn't Tyler "taking China at their word", this is Tyler agreeing with what they are saying.

Your bias is showing.

Thu, 11/11/2010 - 09:48 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture


If you want to see bias in action you only need to read the first sentence:

[...] the developed world's most insolvent nation [...]

The US is very far from being the 'most insolvent nation' of the world. It prints its own currency - unlike Greece and Ireland which are truly insolvent.

The US also has less GDP proportional debt than Japan (which can borrow at 1%) and its bonds were flying out the door at 1% yields even without any Fed assistance, as fast as they were printed, 2x over-allocated: it's the hidden benefit of being the planet's reserve currency of choice.

China does not like that position of the US - and not acknowledging that simple fact of counter-interest when parrotting the Dagong downgrade shows a lack of basic critical thinking.


Thu, 11/11/2010 - 10:17 | Link to Comment Canucklehead
Canucklehead's picture

I think you are missing the point.  There is a market picking coffee beans out of monkey poo but I think the customer base is shrinking...

Thu, 11/11/2010 - 12:23 | Link to Comment More Critical T...
More Critical Thinking Wanted's picture

The thing is, a supposedly 'shrinking customer base' for demand/supply items like US bonds (which is what I guess you called 'monkey poo'?) gets expressed in a very simple way: via their price.

If you really, truly are convinced that the US is more insolvent than Greece or Ireland there's a very easy trade for you: go short Greek and Irish CDS and go long US CDS. You will make a lot of money on that if you are right.

But I suspect neither you nor Tyler has such a position open, right?

Thu, 11/11/2010 - 10:09 | Link to Comment SheepDog-One
SheepDog-One's picture

Are you trying to say US has an AAA or even AA credit worthiness? I wouldnt trust Bernanke with a plug nickle!

Thu, 11/11/2010 - 10:57 | Link to Comment Biff Malibu
Biff Malibu's picture

Question: did you actually READ the Dagong report? I did, and it looked pretty spot on with me. Most of it was pretty obvious to regular readers of this board and was justified.

Thu, 11/11/2010 - 02:34 | Link to Comment 66Sexy
66Sexy's picture

moody's worth a fuck

Thu, 11/11/2010 - 08:55 | Link to Comment aint no fortuna...
aint no fortunate son's picture

well, when moody's gets shut down at least the ANALists will be able to get jobs as fluffers in transvestite porn flicks... oh, wait, the SEC already grabbed them

Thu, 11/11/2010 - 01:46 | Link to Comment Azwethinkweiz
Azwethinkweiz's picture

Hey Moody's, is that cocksauce on your face or spicy honey mustard?

Thu, 11/11/2010 - 01:58 | Link to Comment UGrev
UGrev's picture

General Tsao's 

Thu, 11/11/2010 - 10:59 | Link to Comment Biff Malibu
Biff Malibu's picture

I prefer to call it dick snot. You heard it here first, I invented that name.

Thu, 11/11/2010 - 01:47 | Link to Comment e_goldstein
e_goldstein's picture

i for one welcome our benevolent yellow masters...


Thu, 11/11/2010 - 01:47 | Link to Comment unum mountaineer
unum mountaineer's picture

"whatever happened to that Wells Notice"

didn't you get the memo..

State insurance regulators, led by New York and Illinois, are seeking to reduce their reliance on ratings firms and in November hired Pacific Investment Management Co., manager of the world’s largest bond fund, to replace Moody’s and S&P analysis on home-loan investments held by insurers.

- for all those wondering about PIMCO and munies...dynamite goes?

Thu, 11/11/2010 - 02:13 | Link to Comment Fraud-Esq
Fraud-Esq's picture

OUR bankers FUCKED our country - why are they not in jail?

I will contribute lots of money to anyone who raises it for the SOLE purpose of producing commercials and running them on TV calling for the indictment and imprisonment of our bankers.

Bill Black will contribute to content for free.  

SOMEONE who knows how to do it, set it up!!!

Single issue fundraising. Produce the add. Put it on a fundraiser web site. Show how much money is needed to play it. Money bomb the sonofabitch. Smooze with Huff post, move on, red state, ron paul. This isn't about right or left, it's about fraud and jail!

Thu, 11/11/2010 - 02:36 | Link to Comment Bob
Bob's picture

Interesting proposition, FE.  I have strong doubts that you could buy time to run those tv commercials at any price.

You could generate a hell of a buzz with a full page ad in the NY Times, however.  It would become news, aka free advertising, from there. 


Thu, 11/11/2010 - 02:42 | Link to Comment Fraud-Esq
Fraud-Esq's picture

Jeez, bob, I guess we'll have to call Soros. We need a big benefactor who's willing to throw down that first add. 

Thu, 11/11/2010 - 02:48 | Link to Comment Bob
Bob's picture

I wonder what HuffPo rates are.  Massive traffic and, let's face it, the right demographic. 

Thu, 11/11/2010 - 07:41 | Link to Comment MeTarzanUjane
MeTarzanUjane's picture

Soros is the man bro.

Thu, 11/11/2010 - 09:55 | Link to Comment earnyermoney
earnyermoney's picture

Soros is one of the banksters. You will not get a penny from that sodomizer of the middle class.

Thu, 11/11/2010 - 07:32 | Link to Comment John McCloy
John McCloy's picture

I feel your frustration Fraud. If you feel like your fighting a brick wall it is because you are with most of the public.I hope this year around that with every cable news network at least discussing that "economists say food may face 4-6% inflation costs" that they will finally began to equate this with nothing different than another income tax for them to pay without a match in rising wages.

Thu, 11/11/2010 - 02:12 | Link to Comment Popo
Popo's picture

That Wells notice?  It went the way of our concept of 'failure'.

By Imperial decree, there shall be no more penalties,  career-ending moves,  collapses, discreditations or failures of any kind.   Everything is skittles.

Just look at Bernanke:  If no one regards Bernanke as a failure, then failure itself has failed.



Thu, 11/11/2010 - 02:16 | Link to Comment Fraud-Esq
Fraud-Esq's picture

The top of the pyramid never fails, they just take more of your money than you can spare sometimes.

Thu, 11/11/2010 - 07:57 | Link to Comment jeff montanye
jeff montanye's picture

thank you for the reference.  enlightening and heartening.  the dang internet came just in time for at least a hint of understanding of our dilemma to filter out.  likely not enough to change the result very much.  

must we have ww3 against islam?  are the obama and ron paul girls ironically right?  would ron paul in office resemble obama in office, no matter how different each seems/seemed as a candidate from such performance in office??

Thu, 11/11/2010 - 09:30 | Link to Comment Pope Clement
Pope Clement's picture

Thanks - explains a lot of the CD and also a mother lode for the understanding of the roots of much of the irony of our life and time.

Thu, 11/11/2010 - 03:01 | Link to Comment gwar5
gwar5's picture

"..failure itself has failed.." -- you are one deep monkey Popo! 

People may ask, well... if failure has failed, does that not mean success?

Nope. Popo is correct. Ben "Rainman" Bernanke has an OCD for the USD

It's not like he's a just a retard who can be left alone. It's serious.

Popo is correct.

Thu, 11/11/2010 - 06:00 | Link to Comment Snidley Whipsnae
Snidley Whipsnae's picture

Failure has not failed. Gravity continues to function. The earth continues to rotate....and, Mr Market will continue to due time.

Bernanko has managed to veil failure with outrageous Fed mechanations. That is not the same as failure being eliminated.

BTW, have you noticed that since Sept 1 that both oil and gold are up ~ 18%....Ben can delay dollar failure but he cannot eliminate it.

Thu, 11/11/2010 - 06:07 | Link to Comment alpha60
alpha60's picture

is failure now art?

Thu, 11/11/2010 - 08:35 | Link to Comment bigdumbnugly
bigdumbnugly's picture

is failure the new success?  is huge the new necessary?  is folly the new wise?  is ugly the new handsome?


i am king of the world.

Thu, 11/11/2010 - 02:18 | Link to Comment Bob
Bob's picture

Question is just how easily flattered the Chinese are . . . and what they're willing to do (if anything) in return for the air kisses.  It looks pretty pathetically transparent to me. 

Thu, 11/11/2010 - 02:22 | Link to Comment Fraud-Esq
Fraud-Esq's picture

BTW - while some of you might smell nationalism and competition, China is the CORE aspect of the American elite's wealth. It is core. Many Chinese are a part of the Anglo-American elite. They're members. The old guard lost the fight in China years ago, mostly. 

This action, pegged currency, and all things pro-China makes lots of American investors and multi-nationals very happy. 

The pretense of "war" and "competition" in a diversion for those who believe national boundaries divide the rich. 

Thu, 11/11/2010 - 06:46 | Link to Comment i-dog
i-dog's picture


Spot on ... on every count! I was about to post something similar but you saved me the trouble (and took a lot fewer words than I would have).

And the world will be a much more peaceful place with China as the top dog.

Thu, 11/11/2010 - 02:31 | Link to Comment gwar5
gwar5's picture

Upgraded kneepads? The good kind that Tim Geithner has?

Thu, 11/11/2010 - 09:10 | Link to Comment Peace is the x-axis
Peace is the x-axis's picture

"I come from a land Down Under,
Where beer does flow and men chunder,
Can't you hear, can't you hear the thunder?
You better run, you better take cover"

"In sum, Tim Geithner is a gigantic fool, the IMF the gun that can't shoot straight, Alan Greenspan a bungler. The big US banks were run by the greedy and the hopeless, the Australian banks by counterhopping clerks. It's a world of many villains."

Thu, 11/11/2010 - 02:49 | Link to Comment Burnbright
Burnbright's picture

Is Moody's trying to cause yuan appreciation?

Thu, 11/11/2010 - 02:59 | Link to Comment AUD
AUD's picture

If Moodys also rates UST's AAA then it means nothing.

How can a creditor of the US have worse credit than the US?

Thu, 11/11/2010 - 07:49 | Link to Comment fredquimby
fredquimby's picture


Thu, 11/11/2010 - 03:07 | Link to Comment swissinv
swissinv's picture

How about downgrading Fannie Mae to Ca? AAA rated because it is goverment sponsered  (even not guaranteed) when Dangong rate the US with A+ with negative outlook!!!

Thu, 11/11/2010 - 06:11 | Link to Comment swissinv
swissinv's picture

Thus, less credit risk against China because the US is doing badly and is depending on China, are you nuts!?

Thu, 11/11/2010 - 06:46 | Link to Comment sabra1
sabra1's picture

were the kneepads made in china? anyone?

Thu, 11/11/2010 - 07:35 | Link to Comment johny2
johny2's picture

everything is AAA....HHHhhhhhh......ugh

Thu, 11/11/2010 - 07:39 | Link to Comment williambanzai7
williambanzai7's picture

Thu, 11/11/2010 - 07:45 | Link to Comment Dagny Taggart
Dagny Taggart's picture

I'm thinking this will end as a breaking knees event, New Jersey style, not with the kneepads.

Thu, 11/11/2010 - 10:23 | Link to Comment Grand Supercycle
Grand Supercycle's picture

EURO daily chart bearish warnings continue.

US Dollar daily chart bullish warnings continue.

Thu, 11/11/2010 - 10:29 | Link to Comment Bill Lumbergh
Bill Lumbergh's picture

I can't even believe what is going on nowadays...surreal.

Thu, 11/11/2010 - 12:26 | Link to Comment bugs_
bugs_'s picture

Deep Shah.

Thu, 11/11/2010 - 22:25 | Link to Comment Buck Johnson
Buck Johnson's picture

We are in an intricate trap of our choosing.  By using what we perceive as strengths and the rest of the world as weaknesses, we have put everything on a credit card in order for us not to take our fiscal medicine.  This morning on CNBC the british anchor made comment that americans could be demonstrating to if a change in the retirement age.  The american anchor she said that she doesn't see 65 year old or older going out their and demonstrating like the British students this week.  He tried to explain but didn't do a good enough job.  What he should have done and wasn't was to say instead of raising the retirement age (thats esoteric to the people who are getting SS now), what if SS was cut for the people getting it now by 40%.  You would then see 65 and older demonstrating and rioting along with others. 


Our politicians aren't dumb, they don't go kick the biggest wasp nest to see if their are any wasps.  They go after groups that won't see the results of their bills for a few years if not a decade.  But if you go after people's check books now, or govt. checks now, then you would see massive demonstrations.  We put ourselves in a horrible position, and we are seeing it.  But do politicians go in front of American people and tell them all the promises we made and the money we taxed from you for decades you won't get any of it.  They can't do that because they know Beast, and that is when you have made a population brutish, ignorant, intolerant and Beliefing that might is right in all things, then you have a a recipe for revolution.  They are mostly caring about their own necks.

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