In its latest reminder that China is a (for now) happy holder of some $1.2 trillion in US Treasurys, Chinese credit rating agency Dagong downgraded US sovereign ratings from A- to BBB+ overnight, citing "deficiencies in US political ecology" and tax cuts that "directly reduce the federal government's sources of debt repayment" weakening the base of the government's debt repayment.

Oh, and just to make sure the message is heard loud and clear, 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. Quoted by Reuters, Dagong 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 adding that "Massive tax cuts directly reduce the federal government’s sources of debt repayment, therefore further weaken the base of government’s debt repayment."

Projecting US funding needs in the coming years, Dagong said a deterioration in the government’s fiscal revenue-to-debt ratio to 12.1% in 2022 from 14.9% and 14.2% 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.

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In a preemptive shot across the bow in the coming trade wars, last week Bloomberg reported that Beijing officials reviewing China’s vast foreign exchange holdings had recommended slowing or halting purchases of U.S. Treasury bonds. That warning 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, although China’s foreign exchange regulator has since dismissed the report as "fake news."

Still, Dagong was quick to point out that not much would be needed to crush the public's confidence in the value of US Treasurys:

“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.

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To be sure, China's move is far more political than objectively economic, and is meant to send another shot across the bow as the Trump administration prepares to launch a trade war with Beijing in the coming weeks. Still, while both Fitch and Moody’s give the United States their top AAA ratings (and the S&P is the only agency to infamously downgrade the US to AA+ in 2011), US raters have also expressed concerns similar to Dagong‘s. From Reuters:

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.

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.