Shoppers in Oxford Street, London. Dagong's downgrade of the UK came after Standard & Poor's revision of the outlook for Italy's sovereign debt from stable to negative on May 21. Rogan Macdonald / Bloomberg News

Chinese exports to Europe will be largely unaffected, economists say

SHANGHAI - The United Kingdom's (UK) sovereign credit rating was downgraded on Tuesday by the Chinese domestic rating agency Dagong Global Credit Rating Co Ltd, citing the country's deteriorating debt repayment capability.

The downgrade stirs more concerns about the eurozone sovereign debt crisis, which economists said is the result of the bloc's high social welfare expenditure and is being prolonged by insufficient rescue measures.

The crisis, which started out in Greece last year, will have little impact on China's economy, economists said.

In a statement, Dagong cut the ranking of UK's local and foreign currency sovereign credit from AA- to A+ with a negative outlook for its solvency.

"The downgrade reflects the true status of the deteriorating debt repayment capability of the UK and the difficulty in improving its sovereign credit level in the long term," said Dagong.

The rating agency said that in 2010, the UK government's deficit reached 9.8 percent of GDP, and the debt burden rose to 78.7 percent of GDP.

The deficit is at a high level because the UK government's policies to cut fiscal expenditures are being offset by social problems, continuous high inflation and relatively low economic growth, it said.

Going forward, Dagong sees "no substantial change" to the UK's macroeconomic policies. It estimates the nation's economy will grow 1.3 percent and 1.5 percent in the coming two years, continuing a sluggish 1.3 percent growth in 2010 that is lower than the average of the G7 and the world.

"The sovereign debt crisis in the eurozone has not touched the bottom yet," said Lu Zhengwei, chief economist with Industrial Bank.

"Dagong's downgrade of the UK is the latest sign that the crisis is still deteriorating."

Dagong's downgrade on the UK came following Standard & Poor's revision on the outlook of Italy's sovereign debt from stable to negative on May 21.

Charlie Munger, vice-chairman of Warren Buffett's Berkshire Hathaway Inc, described the eurozone's early intervention in the crisis as "a pea shooter at an elephant", in a news briefing early this month in the United States.

Industrial Bank's Lu said that while it might take another two years for the eurozone to move out of its crisis, Chinese exports to the EU would be largely unscathed.

"The troubled nation will spend more to refinance its debt, which will cut into its purchasing power. But their demand for Chinese export is largely inelastic," said Lu.

"However poor they are, they have to wear shirts and shoes."

Wang Jianhui, chief economist with Southwest Securities, said that even if large-scale defaults happen in the eurozone and the euro depreciates sharply, China will not be hard hit.

"About 80 percent of China's sovereign foreign investment is denominated in the US dollar. The euro accounts for a small part of China's foreign investment."

Zuo Xiaolei, chief economist with Galaxy Securities, sees the eurozone debt crisis as a silver lining, saying it actually provides opportunities for China.

"Some of the troubled nations will put their state-owned assets on sale at a discount to finance their debt. China should grab the opportunity to buy these assets, which should be a good bargain.

Founded in 1994, Dagong is a Chinese pioneer in the creation of credit rating standards for industries, regions and countries. The agency had already published sovereign credit ratings in two earlier reports.

"We feel that there should be more voices in the sphere of global credit rating, especially after the lessons of the world financial crisis," said Zhang Jun, general manager of Dagong's enterprise planning department.

"Diversified voices can make the ratings more objective to better serve and protect investors," he said.

China Daily