Has ratings firm Moody's Investors Services just given Prime Minister Narendra Modi a chance to drive the Indian economy faster? Moody's downgraded China's long-term local and foreign currency issuer ratings today by one notch to an A1 rating from AA3, citing expectations that the financial strength of the world's second biggest economy would erode in the coming years.
"The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows," Moody's said. Rating downgrade will raise borrowing costs for China.
The downgrade is not likely to give India an edge over China as its rating still remains among the highest. Yet, the downgrading signals to the international community that all is not well with China, especially when it is launching its ambitious one-belt one-road initiative which aims at global dominance.
Though India lags far behind China in several fields, the communist country is getting wary of India's gains in foreign direct investment (FDI), technology and manufacturing.
China faces dwindling foreign exchange reserves when India is aggressively pushing itself as a destination for foreign investment. Recently, President Xi Jinping had vowed to open up China like never before. Premier Li Keqiang has also announced that foreign firms would be treated the same as domestic firms when it comes to licence applications, standard setting and government procurement and would enjoy same preferential policies under Made in China 2025 initiative. In 2015, India was for the first time the leading country ($63 billion) in the world for FDI by capital investment, overtaking China ($56.6 billion) and the US ($59.6 billion). This had set the alarm bells ringing in the Chinese establishment.
China is also scared of India overtaking it in manufacturing in the long term as labour costs in China are rising. Global Times, a Chinese establishment newspaper, wrote recently in an article headlined 'China should pay more attention to India’s increasing manufacturing competitiveness': “Although India is still in its initial stage of developing export-oriented manufacturing industries, the country has great potential to emerge as a regional hub for labour-intensive industries. One recent analysis showed China’s manufacturing hourly wage in 2016 was roughly five times that in India.”
The trigger for the article was India’s exports to China increasing 42% in January this year. Though China has a big edge over India in bilateral trade, it wants to see if the rise in Indian exports is a flash in the pan or a trend.
The importance of Moody's China downgrade may be more symbolic than substantial for the communist country. Though India cannot be seen as China's economic rival for the far bigger economy of China, it certainly benefits from any drop in sentiment about China in the outside world.
Source: economictimes.indiatimes.com