China’s Chengxin International Credit Rating (CCXI) dealt a blow to the United States’ financial standing by lowering its credit rating. The move by CCXI – China’s most established credit rating agency – is a poignant reminder of the mounting economic challenges facing the world’s largest economy.
A downgrade amidst the debt ceiling discord
CCXI revised the US credit rating downwards from AAAg to AAg+, attributing this notable decision to the surging political conflict, mounting inflation, and a prolonged deadlock over the debt ceiling. This move reflects growing apprehension about the US’s financial health and stability. Concurrently, it marks the Chinese institution’s first public expression of concern over the US debt issues.
A potent mixture of the unresolved debt ceiling standoff, deteriorating fiscal robustness, and political polarization were highlighted by CCXI as key drivers of their decision. The agency noted that the impasse over the debt ceiling is compounded by the hardening of political divisions, which has ratcheted up the complexity of negotiations.
In its warning, CCXI stated, “The escalation in political divisions in the United States has intensified the difficulty of resolving the debt-ceiling issue.” It further commented on how recurrent breaches of the debt ceiling are steadily eroding the US dollar’s credit base.
Ripple effects of a downgraded rating
This rating downgrade comes as a stark departure from other credit rating agencies’ approach, like Fitch, Moody’s, and S&P. These agencies have instead placed the US’s AAA rating on a ‘watch’, expressing growing unease about the US’s fiscal situation but stopping short of a downgrade.
The downgraded rating from CCXI could incite increased short-term borrowing costs, with potential reverberations felt across multiple sectors. Beijing, the second-largest holder of US Treasury bills, has not officially responded, but it has substantially cut its holding of US Treasury bills in the past year, reducing them by 14.2%.
CCXI’s move coincides with mounting geopolitical tensions between the US and China, adding another layer of complexity to the unfolding economic narrative. The stage is set for uncertainty as the repercussions of the US’s downgraded credit rating take hold.
Whether a resolution is achieved, the agency contends that political brinkmanship could inject uncertainty into the US government’s policy path, weaken economic confidence, and trigger further instability in US politics and the economy. As the world grapples with the potential implications of CCXI’s decision, it remains to be seen how this dramatic shift will impact the global financial landscape.