India Doesn't Deserve To Be Equal To China
Panos Mourdoukoutas
India doesn't deserve to be next to China -- when it comes to credit rating agencies that is.
That's according to all major credit agencies, which give China a near perfect score — close to the US — and India a near junk score. Fitch, for instance, gives China A+, and India BBB- (see table).
China’s and India's Credit Rating
Country
S&P
Moody’s
Fitch
China
AA- negative
Aa3 stable
A+ stable
India
BBB- Stable
Baa3 positive
BBB- stable
India’s credit rating lag behind China is also reflected in credit markets, where the Indian government has to pay almost twice as much as China to borrow money for ten years—see table.
China’s and India’s 10y Bond Yields
Country
10-year Treasury Bond Yield
China
3.37%
India
6.40
USA
2.46
That’s certainly upsetting to India's government officials, who blame credit agencies for favoring China over India. Specifically, they are critical of the agencies for failing to lift India’s credit rating despite its improving economic fundamentals, like robust economic growth rates and fiscal discipline.
At the same time, they point to the fact that the agencies have failed to lower China’s rating in spite of deteriorating fundamentals like -- the slowing down of the economy and soaring debt to GDP ratio.
China’s And India’s Equities
Index/Fund
12-month Performance
10-year Performance
iShares India (INDY)
19.45%
18.25%
IShares China (FXI)
23.21
-13.32
Which side is right, the credit rate agencies or the Indian government officials?
Only time can tell for sure, as credit ratings are at best guesses about the future state of different economies. This means that they are based on judgments and assumptions that can end up being wildly wrong.
“Because it involves a look into the future, credit rating is by nature subjective,” says Moody’s in its official site. “Moreover, because long-term credit judgments involve so many factors unique to particular industries, issuers, and countries, we believe that any attempt to reduce credit rating to a formulaic methodology would be misleading and would lead to serious mistakes.”
As turned out to be the case back in the eve of the 2008-9 financial crisis, when credit rate agencies assigned the wrong grade to exotic products that contributed to the crisis.
How can credit agencies, for instance, figure out China’s government debt when the government is both the lender (governmentally owned banks), and the borrower (state-owned enterprises)?
To be fair, the same could be said about India, where the government plays a similar role to that in China.
Still, China has a recent history of current account surpluses and enormous foreign currency reserves, while India has a recent history of current account deficits and moderate foreign currency reserves. This means that China lives below its means, while India lives beyond its means.
That’s a situation that may become worse with Narendra Modi's free cash for everyone, which is expected to turn India into next the Brazil.
Persistent current account deficits make India more vulnerable than China to the next global crisis – one that, should it occur, will shift the tides of foreign capital flows from emerging countries back to developed countries—a big concern for the credit rating agencies and foreign investors that rely on them.
The bottom line: To move next to China in the credit rate scale, India must learn to live within its own means.
Panos Mourdoukoutas
India doesn't deserve to be next to China -- when it comes to credit rating agencies that is.
That's according to all major credit agencies, which give China a near perfect score — close to the US — and India a near junk score. Fitch, for instance, gives China A+, and India BBB- (see table).
China’s and India's Credit Rating
Country
S&P
Moody’s
Fitch
China
AA- negative
Aa3 stable
A+ stable
India
BBB- Stable
Baa3 positive
BBB- stable
India’s credit rating lag behind China is also reflected in credit markets, where the Indian government has to pay almost twice as much as China to borrow money for ten years—see table.
China’s and India’s 10y Bond Yields
Country
10-year Treasury Bond Yield
China
3.37%
India
6.40
USA
2.46
That’s certainly upsetting to India's government officials, who blame credit agencies for favoring China over India. Specifically, they are critical of the agencies for failing to lift India’s credit rating despite its improving economic fundamentals, like robust economic growth rates and fiscal discipline.
At the same time, they point to the fact that the agencies have failed to lower China’s rating in spite of deteriorating fundamentals like -- the slowing down of the economy and soaring debt to GDP ratio.
China’s And India’s Equities
Index/Fund
12-month Performance
10-year Performance
iShares India (INDY)
19.45%
18.25%
IShares China (FXI)
23.21
-13.32
Which side is right, the credit rate agencies or the Indian government officials?
Only time can tell for sure, as credit ratings are at best guesses about the future state of different economies. This means that they are based on judgments and assumptions that can end up being wildly wrong.
“Because it involves a look into the future, credit rating is by nature subjective,” says Moody’s in its official site. “Moreover, because long-term credit judgments involve so many factors unique to particular industries, issuers, and countries, we believe that any attempt to reduce credit rating to a formulaic methodology would be misleading and would lead to serious mistakes.”
As turned out to be the case back in the eve of the 2008-9 financial crisis, when credit rate agencies assigned the wrong grade to exotic products that contributed to the crisis.
How can credit agencies, for instance, figure out China’s government debt when the government is both the lender (governmentally owned banks), and the borrower (state-owned enterprises)?
To be fair, the same could be said about India, where the government plays a similar role to that in China.
Still, China has a recent history of current account surpluses and enormous foreign currency reserves, while India has a recent history of current account deficits and moderate foreign currency reserves. This means that China lives below its means, while India lives beyond its means.
That’s a situation that may become worse with Narendra Modi's free cash for everyone, which is expected to turn India into next the Brazil.
Persistent current account deficits make India more vulnerable than China to the next global crisis – one that, should it occur, will shift the tides of foreign capital flows from emerging countries back to developed countries—a big concern for the credit rating agencies and foreign investors that rely on them.
The bottom line: To move next to China in the credit rate scale, India must learn to live within its own means.
