MOODY’S CHINA DOWNGRADE – GOOD NEWS FOR MODI’S INDIA?

By Ruma Dubey

For the first time since 1989, Moody’s Investors Service cut its rating on China’s debt. Moody’s reduced the rating to A1 from Aa3 and changed the outlook to stable from negative.

Moody’s said the downgrade reflects its expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.

This has naturally infuriated the Chinese leadership, President Xi Jinping, who is simply not used to such treatment. The Finance Ministry of China has responded back saying that it was “absolutely groundless” for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities. It has said rather vehemently that Moody’s has underestimated the capability of the government to deepen reform and boost demand.

This reaction is not something unique to China, this is how we would have reacted, uttered the same words and this is exactly how even USA reacted when S&P downgraded it in 2011.

A downgrade may or may not cause much material harm but it does lend a body blow to the image of the country. The psychological impact is much deeper and it casts a pall of doubt over the country and its abilities. Unlike in India, much of the debt which Moody’s is referring to is held by Govt or semi-Govt agencies, very little is actually owned by the international investors. Thus ramifications of this financial pressure directly would be minimal on the world as such.

But the impact otherwise, indirectly, will be felt. Look at the metal index on the BSE today- it is down almost 2% and amongst the 10 stocks in the index, 9 are in the red; only stock up is Jindal Steel. China is the world’s largest consumer of metals, so naturally the fear is that a downgrade will affect demand for metals from India.

Thus if we look at this logically, we cannot ignore China as it looms large over the globe today simply because it so humungous; towering like the Mt. Everest. Like mountaineers vying to climb the Everest, with unpredictability threatening at every step despite years of experience, China too is an enigma. No one, not even the best brains at Goldman or Moody’s or GE or Apple, are able to lay a finger on the exact working of its development model. Forming alliances with some of the most dangerous and authoritarian countries in the world, while signing the dotted lines with developed countries, one cannot really fathom what really lies beneath.

Coming to the basic question – can we today cope with a slowdown in China? Well, it will hurt; there is no beating around the bush there, after all we have a trade deficit to the tune of $53 billion with China. If the second fastest growing economy slows down, impact is certain. But what makes this different from the earlier slowdown threats is that this time around, USA is slowly but surely bouncing back. Despite Trump, USA is a better market today and this is a big game changer.

Also remember, Moody’s is a rating agency and most of these agencies, give a rating much after the world has discounted the facts – it is always behind the curve. So the ground reality in China was known all along and Indian companies were as such coping with a slower demand.

Yes, India might get the opportunity to brag once again that it is fastest growing economy in the world but few will really believe it as the ground reality is something else. Our exports are sagging, unemployment is high, private investment is nonexistent and banks are bleeding. Yes, the sentiments remain optimistic.

Thus India will not replace China as the “factory of the world” as we still do have the infrastructure and bandwidth in place. Our ‘Make in India’ has to truly take off.  We simply cannot tame the fire spewing giant dragon that China is; that’s the harsh truth.