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New World Borders

China's new economic power is helping the world overcome a surprising slump in U.S. creditworthiness. Institutional Investor's exclusive Country Credit survey shows ratings at a 25-year high.

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President Hu Jintao's visit last month to eight African countries spoke volumes about the state of the world economy today. With China's economy roaring ahead at a 10 percent annual clip and racking up massive surpluses with the U.S., the Chinese leader signed several trade and aid deals to secure raw materials for his country's factories. That burgeoning trade is recycling massive amounts of dollars to the world's commodities-producing countries and brightening their economic outlook.

This new dynamic is causing seismic shifts in global creditworthiness. The average credit rating of most of the world's countries rose by 2.2 points, to 46.1, in the past six months, according to Institutional Investor's exclusive Country Credit survey. The increase is the biggest change since a 2.5-point increase in the six months ended September 2000; the overall rating is well above the recent peak of 45.1 reached one year ago, and marks the highest rating since September 1981, when there were far fewer developing countries in the survey. Fully 163 of the 174 countries ranked by credit analysts see their ratings rise, including 132 that gain at least one point, the amount considered statistically significant.

Amid the prevailing optimism, however, one country stands out for its wrongfootedness: the U.S., the longtime benchmark of global creditworthiness, sees its rating fall 0.5 point, to 94.0. That decline, combined with modest gains across Western Europe, drops the U.S. to 13th place in the global ranking from eighth place six months ago. This ranking marks the first time since II began measuring country creditworthiness in 1979 that the U.S. fails to make the top ten.

The top five countries remain the same since our September 2006 ranking, led by Switzerland with a 96.3 rating, up 0.2 point. In notable moves, Denmark jumps from ninth to sixth, up 0.9 point, changing places with the U.K.

"There is concern that the U.S. economy is slowing down," explains one British banker. "Plus, the trade deficit remains troubling, and the war in Iraq is increasingly seen as a disaster."

How is the U.S. falling as seemingly everyone else rises? After all, when the U.S. sneezes, isn't the rest of the world supposed to catch a cold? The old saw may no longer hold true, says Rainer Siegelkow, an executive director at WestLB. "The importance of the U.S. for the global economy appears to have declined somewhat," he says, "so if the U.S. is going to slow down, there is a good chance the infection from this bacillus would be less pronounced than in the past."

One reason is a reduced dependence on the U.S. Some 20 percent of Europe's exports now go to Asia, compared with 15 percent to the U.S. Then, too, with China's overall trade surplus widening to a record $177.5 billion last year, the country has an ever-increasing amount of dollars to recycle. American investors seemed to sense this ebbing of U.S. economic centrality. Last year 68 percent of U.S. net inflows into mutual funds, or nearly $195 billion, went to international or global funds, according to Boston-based Financial Research Corp.

Some of the strongest increases in credit ratings occurred in regions that in the past have been among the first to catch cold from the U.S. Sub-Saharan Africa, which has seen its average score typically mired in the low 20s, climbs 2.6 points, to 24.2. That is the region's highest rating since March 1983, when only a small number of relatively advanced African countries were ranked. All 47 African nations post gains, including 42 by at least one point, reflecting the fact that Africa's traditional economic weakness -- its dependence on commodities exports -- has suddenly become a strength.

Sino-African trade has more than quadrupled since 2002, reaching $55 billion last year. Angola has surpassed Saudi Arabia as China's main supplier of oil, and Chinese companies are big buyers of Guinea's bauxite, Zambia's copper, Namibia's uranium and assorted metals from Congo. "Since 2001, Africa has been growing faster than the industrial countries," says Michael Power, an investment strategist at Investec Asset Management in Cape Town.

Latin America and the Caribbean match Africa's 2.6 point rise, with 24 of the region's 27 countries gaining at least one point. "They are also major commodities exporters, whether it's oil or soybeans or beef," notes Rezmi Markar, senior country analyst at Canadian Imperial Bank of Commerce in Toronto.

That export strength has led risk analysts to largely shrug off the region's recent political shift to the left. President Evo Morales may be nationalizing Bolivia's energy industry, but his country's rating is up 2.8 points. And Venezuelan President Hugo Chávez may be silencing his opponents at home and seeking to spread socialism throughout the region, but his oil-rich country gains 2.7 points. But most credit analysts regard these leaders as aberrations from the predominant trend of center-left leaders like the recently reelected President Luiz Inácio Lula da Silva of Brazil, whose rating advances 3.6 points.

Eastern Europe and Central Asia boast the strongest gains, with the region's average rating surging by 4.0 points -- one of the biggest gains ever by any region. All 29 countries in the area see their ratings rise, including 28 by one point or more. High oil prices power the increases for Russia (up 5.8 points), Kazakhstan (up 6.1 points) and Turkmenistan (up 4.5 points), while accession to the European Union boosts Bulgaria (up 4.0 points) and Romania (up 5.0 points).

Asia-Pacific also takes part in the uptrend, with developing countries in South and East Asia rising 2.0 points on average; 19 of the 23 countries are up, including 16 by at least one point. Asia once lived or died on U.S. trade, but now there is China. As Anita Gray, an economist at Standard Chartered Bank in London notes, "Intra-Asian trade has overtaken Asian trade with the U.S., so how China is doing impacts how Asia as a region does." And China (which is up 4.1 points) is, of course, booming. That strength pulls up the region's developed economies, including Hong Kong (up 2.4 points), Australia (up 1.9 points) and Japan (up 1.3 points).

The wave of optimism even reaches the troubled Middle East and North Africa. Sixteen of the region's 19 countries post gains, including 13 of at least one point. The increases for major oil producers come as no surprise, but Israel (up 3.7 points) and Egypt (up 3.1 points) also advance smartly as strong economic performances outweigh worries about political discord.

Looking ahead, Gray says that although the U.S. economy is likely to slow down this year, global creditworthiness shouldn't suffer.

"China is a second engine of growth, and combine that with Japan, which should stage a recovery this year, and the euro zone, which is staging a classic recovery, this will counterbalance the slowdown in the U.S."

In short, the global economic train now has several locomotives.