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China's Dagong lowers US sovereign ratings to Peru level following tax cuts

* Dagong cuts U.S. ratings to BBB+ from A-, outlook negative

* Says tax cuts, increasing reliance on debt weaken U.S. solvency

* U.S. now on par with Peru, six notches below Chinese local debt

By Ryan Woo and Marius Zaharia

BEIJING/HONG KONG, Jan 16 (Reuters) - China's Dagong Global Credit Rating Co, one of the country's major ratings firms, cut the sovereign ratings of the United States to BBB+ from A-, saying the tax reductions announced last month weakened Washington's ability to repay debt.

The ratings, which are now level with those of Peru, Colombia and Turkmenistan on the Beijing-based agency's scale of creditworthiness, have also been put on a negative outlook.

In a statement on Tuesday, Dagong warned that the United States' increasing reliance on debt to drive development would erode its solvency. It made specific reference to President Donald Trump's tax package, which is estimated to add $1.4 trillion over a decade to the $20 trillion national debt burden.

"Deficiencies in the current U.S. political ecology make it difficult for the efficient administration of the federal government, so the national economic development derails from the right track," Dagong said.

"Massive tax cuts directly reduce the federal government's sources of debt repayment, therefore further weaken the base of government's debt repayment."

The U.S. embassy in Beijing could not immediately comment.

The downgrade came as China's excess production capacity for both steel and aluminum emerged as a major trade irritant for the United States, which is considering new steps to shield its industries and jobs.

Dagong's cut has put the United States on par with ratings for most emerging economies.

Christopher Balding, associate professor of business and economics at the Peking University HSBC Business School in Shenzhen, said such a ratings decision "simply doesn't make sense, looking at the numbers".

He noted that "the U.S. economy has been doing very well lately."

Fitch and Moody's Investors Service both give the United States their top AAA ratings. S&P Global rates it AA+.

But while western ratings agencies have more upbeat views on the United States, they too have expressed concerns similar to Dagong's.

S&P Global said last month's proposed U.S. tax cuts would increase the federal deficit and looser fiscal policy could prompt negative action on U.S. credit ratings if Washington failed to address long-term fiscal issues.

In November, Fitch said the tax cuts would give a short-lived boost to the economy, but add significantly to the federal debt burden. It warned that the United States was the most indebted AAA-rated country and ran the loosest fiscal policies.

Moody's said in September any missed debt payment as a result of disagreement over lifting the debt ceiling, a perennial point of partisan contention in Washington, would result in the United States losing its top-notch rating.

U.S. government debt is widely seen by markets as the most liquid and safest asset in the world. U.S. 10-year yields were down 1 basis point on the day at 2.54 percent.

Yields on 10-year local currency Chinese sovereign bonds, which Dagong rates six notches above U.S. debt at AA+, were down 7 bps at 4.02 percent.

China is rated A+ by S&P Global and Fitch and A1 by Moody's, with the three agencies citing risks mainly related to corporate debt, which is estimated at 1.6 times the size of the economy and mostly attributed to state-owned firms.


'CRISIS DETONATOR'

In December, the U.S. government reported a $23 billion deficit, compared with a gap of $27 billion from the year-earlier month. That took the deficit for the fiscal year to December to $225 billion, versus a gap of $210 billion a year earlier.

Dagong said a projected deterioration in the government's fiscal revenue-to-debt ratio to 12.1 percent in 2022 from 14.9 percent and 14.2 percent in 2018 and 2019, respectively, would demand frequent increases in the government's debt ceiling.

"The virtual solvency of the federal government would be likely to become the detonator of the next financial crisis," the Chinese ratings firm said.

Last week, Bloomberg News reported that Beijing officials reviewing China's vast foreign exchange holdings had recommended slowing or halting purchases of U.S. Treasury bonds.

That spooked investors worried that sharp swings in China's massive holdings of U.S. Treasuries would trigger a selloff in bond and equity markets globally. The report sent U.S. Treasury yields to 10-month highs and the dollar lower.

China's foreign exchange regulator has since dismissed the report.

"The market's reversing recognition of the value of U.S. Treasury bonds and U.S. dollar will be a powerful force in destroying the fragile debt chain of the federal government," Dagong said. (Additional reporting by Philip Wen in BEIJING; Editing by Shri Navaratnam and Sam Holmes)