UK credit rating downgraded... by China

George Osborne in front of a Chinese national flag Despite George Osborne's best efforts, the Chinese agency said slow growth would keep the deficit high

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The UK's credit rating has been cut by the Dagong rating agency of China.

The agency blamed the UK's sluggish growth, which it said would be stuck in the 1.3%-1.5% range for two more years, hurting government finances.

The downgrade from AA- to A+ puts Britain on a par with Chile and heavily-indebted Belgium, and the US, which Dagong downgraded in November.

In contrast, the big three Western rating agencies all still award the UK - and the US - the top AAA rating.

Dagong kept a negative outlook on the UK's rating, suggesting that more downgrades may be yet to come.

Deficit overshoot

"Obviously this is not one of the main rating agencies that markets pay close attention to," noted Sarah Hewin, European head of economic research at Standard Chartered.

But she said the comments could still have an impact on market sentiment, just because they are a reminder that all is not well in the UK.

"Although the fiscal side is being tackled, [Dagong] sees relatively low growth and high inflation," she explains.

The Chinese agency forecast that because of the slow growth, the budget deficit would still overshoot the government's 7.9% to 9% target, despite George Osborne's best austerity efforts.

It also warned that persistently high inflation could necessitate future rate hikes, increasing the UK's borrowing costs, while contagion from the eurozone debt crisis was also "likely to further worsen the government's fiscal status".

Politics of ratings

The three Western rating agencies - Moody's, Standard and Poor's, and Fitch - were heavily criticised for awarding excessively high ratings to mortgage securities and other debts that turned out to be toxic during the financial crisis.

Yet despite this failure, they remain highly influential because Western fund managers and banks typically face limits on what they can invest in that are based on credit ratings.

In contrast, Dagong's ratings are not widely relied on by investors outside China.

Some critics suggest that Dagong's ratings may offer a more impartial view of the true health of government finances in Europe and North America.

The Chinese president, Hu Jintao, called last year for global regulators to impose a more consistent methodology for the way in which sovereign governments are rated.

But while the Western agencies have threatened to review their ratings of both the US and UK in the past, none has yet to take action.

Meanwhile, Dagong - founded in 1994 - rates its home country of China AA+, three notches above the UK and US, and much higher than the People's Republic is ranked by the three western agencies.

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