• When China intrigue shares the stage at the Miss World pageant, you know we’ve got problems.

    That’s the buzz in Sanya, China, where American Alexandria Mills recently won the tiara in an upset over Miss Norway -- the bookies’ favorite. Observers cried foul after the Norwegian beauty didn’t even crack the top five. Was it retribution for the Nobel Peace Prize going to jailed dissident Liu Xiaobo?

    The mere fact this is being debated shows two things. One, how far and wide the tentacles of China’s relationship with the world are traveling. Two, how much that rapport has deteriorated since the Nobel announcement last month. Since then, China lobbied governments to boycott the Nobel ceremony in Oslo, territorial disputes in Asia heated up and tempers flared over rare-earth materials exports.

    Tit-for-tat geopolitics also is creeping more and more into financial matters. A move by China’s Dagong Global Credit Rating Co. this week to downgrade the U.S. could be the latest case in point, and a worrisome one at that.

    Only President Barack Obama’s staff would have the audacity to suggest America’s finances are fine. U.S. deficits are antagonizing the world at a time when the Federal Reserve is opening the monetary floodgates anew. The Fed’s latest quantitative-easing effort has eyeballs rolling from Berlin to Seoul.

    Politics Abound

    Really, if you gave an accountant a random sampling of national balance sheets without saying which countries they belong to, some developing nations might get a higher rating than the U.S. Yet only politics can explain China receiving a higher Dagong credit rating than the issuer of the world’s reserve currency.

    The Fed’s latest steps don’t give Dagong officials political cover. Their move to cut the U.S.’s rating to A+ from AA seems wryly timed to coincide with this week’s Group of 20 summit in Seoul.

    “The general market perception is that there’s a risk that the Chinese rating agency is playing a bit more political game than providing independent analysis,” says Ian Lyngen, a bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

    Granted, a similar problem helped fuel the subprime loan crisis. Moody’s Investors Service and Standard & Poor’s Corp. rated garbage as AAA. Their lack of independence from the entities to whom they provided top ratings helped bring capitalism to the brink of collapse. It helped deliver the U.S. economy to the heavily-indebted place in which it now finds itself.

    Dagong had a valid point in July when it stripped the U.S. of its AAA rating. Conversely, on the surface at least, China would seem to be among the least ugly contestants in the global economic beauty pageant.

    Ratings Overkill

    This latest U.S. rating cut, though, is overkill. Everyone knows America’s finances are a mess. Much the same could be said of the euro zone, where Greece’s fiscal nightmare foreshadows darker realities. Japan’s debt challenges are hardly news. Dagong’s number crunchers would be better off mining the Chinese economy for cracks than pointing fingers overseas.

    What the world doesn’t know is where the big risks lurk in an economy that surpassed Japan as the second-largest earlier this year. Five years ago, China’s non-transparent model was fine as it busily worked to fuel growth and reduce poverty. Today, China is too vital to let potential pitfalls fester beyond investors’ view.

    Chinese credit analysts should be trolling for signs that the massive stimulus of recent years is morphing into a bad-loan crisis. They should be looking into the veracity of rural growth figures that often come in far above the national average. They should be searching for asset bubbles and speaking out against the corruption that slows economic reform.

    Wad of Dollars

    The monumental build up of currency reserves should be reviewed. Why any nation needs a wad of cash equal to almost half of its annual gross domestic product is beyond me. By loading up on dollars, China is distorting its money supply and adding to its overheating risks.

    In Seoul this week, much of the focus is yuan-related. The odds of G-20 officials getting China to boost its currency are almost nil. More likely, events will reinforce the every-nation- for-itself dynamic that has dominated since Wall Street’s near- collapse in 2008.

    That goes for the U.S., too. The Fed’s latest steps will send new rounds of hot money coursing through Asia’s economies, adding to inflation risks. A split Congress means America is likely to be borrowing even more from China to cut taxes. Such actions will do more to exacerbate global imbalances than boost U.S. growth.

    That gets us back to Miss World. Economies compete a bit like beauty contestants in the best of times. Each takes pains to look prettier than the others, seem more talented and appear more confident on the catwalk of capitalism. The posturing has gotten nastier and more desperate over the past two years.

    Nowhere is that clearer than Asia. The region is coming to terms with the idiosyncrasies of a new superpower while U.S. influence wanes. Those tensions are bubbling up everywhere from credit-rating decisions to beauty contests. It’s not what you would call a pretty picture.

    (William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

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