By Kevin Yao
BEIJING (Reuters) - The United States may see further sovereign rating downgrades if it fails to improve its debt service capability, although a near-term cut looks unlikely, the head of Chinese credit rating firm Dagong said.
Beijing-based Dagong Global Credit Rating Co grabbed the media spotlight in October by cutting the U.S. rating by one notch to A-minus from A, despite a deal by Congress to raise the government's borrowing ceiling.
"Our rating could be effective for some time. We won't cut the rating at will," Guan Jianzhong, chairman of Beijing-based Dagong, told Reuters in an interview.
"We are very worried about the U.S. economy. The Federal government hasn't unveiled any strategic measures to fundamentally resolve the (debt) problem."
Guan did not say how far the U.S. rating could be cut, but he cited an earlier prediction by an unnamed American analyst that Dagong may slash the rating to B by 2020.
"We don't hope this will happen. But I think the trend of rating cuts does exist if the U.S. debt level continues to rise and its economic fundamentals don't improve," he said.
The Obama administration may be able to raise the debt ceiling again in February, but Washington must find ways to revive growth in the world's largest economy and boost fiscal revenues to fundamentally shore up its debt service capacity, he said.
Dagong sparked controversy in July 2010, when it commenced its sovereign rating research by giving the United States a rating - AA for both local and foreign currency debt - lower than China's AA+ for yuan debt and AAA for its foreign currency debt that has been maintained until now.
It downgraded the U.S. rating on concerns over quantitative easing in November 2010, and cut again in August 2011.
Dagong's ratings are barely watched outside of China, and major international credit agencies classify most countries very differently from the Chinese agency.
Guan called for Beijing to stop channelling the country's foreign currency reserves - the world's largest at $3.66 trillion at the end of September - to avoid suffering from further losses as the dollar falls.
About a third of the war chest of foreign currency reserves is parked in U.S. Treasuries, although China's central bank has been trying to diversify away from dollar assets.
Gang said the government should shift part of the reserves to local companies to let them invest overseas to generate higher returns.
"The United States will not openly default, but it will print huge amounts of dollars to help repay its debt, which is risky," Guan added.
In a rare move earlier this year, Dagong downgraded bonds issued by three financing vehicles wholly owned by Chinese cities in provinces of Jilin, Hubei and Jiangxi.
"That was a warning sign on local debt. Their debt payment ability declined and we saw no sign of any quick recovery," he said, without saying whether more of such cuts are in the pipeline.
Guan said the company had paid a price for breaking ranks with local rivals as it lost some customers in a highly competitive market.
Most local government financing firms are set up by local governments to borrow funds to finance local investment projects. Domestic corporate debt defaults are rare with banks or the government stepping in to cover potential losses if a firm gets into trouble.
Guan said the chances of debt defaults by Chinese provinces and cities remain slim as Beijing may flex its fiscal muscle to bail them out, despite growing market fears that slower economic growth could push some to the brink.
"A default could be disastrous. Other local governments may help and the central government will not allow it to default."
The National Audit Office is widely expected to publish the latest data on local debt piles soon amid market fears of a sharp increase from the 10.7 trillion yuan ($1.76 trillion)recorded in 2010.
Guan's long-term ambition is to challenge the dominance of the "big three" global ratings agencies - Standard & Poor's (MHFI.N), Moody's Investors Service (NYS:MCO) and Fitch Ratings (PAR:FIM) - after the global financial crisis resulted in a major loss of faith in the established players.
Dagong is focusing its global expansion in Europe and Asia after its application to enter the U.S. market was rejected by the Securities and Exchange Commission in 2010, Guan said.
Dagong is targeting 5-10 percent of the European market by 2017, seeking to cash in on criticism of the big three ratings agencies after the financial crisis and marry European debt issues with its capital-exporting homeland.
In July, Dagong launched a joint venture - the Universal Credit Rating Group (UCRG) in Hong Kong - with Egan-Jones Ratings Co of the United States, and Russia's RusRating JSC.
The domestic market still generates more than 90 percent of Dagong's annual revenues, he added. Dagong, which is privately owned, was set up in 1994.
"Our goal is to become an internationally renowned rating agency by 2019," Guan said.
(Editing by Jacqueline Wong)