S&P rating agency on Thursday downgraded China’s rating by one notch from AA- to A+ reportedly due to rising economic and financial risks after a heavy credit growth months after Moody’s also downgraded the dragon nations sovereign rating. Despite the cut, China still remains five notches above India. Earlier, the agency had warned that rising local debt was putting pressure on China’s performance. Earlier, S&P had warned that rising local debt was putting pressure on China’s performance.
“The downgrade reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks. The increases have often been above the rate of income growth. Although this credit growth had contributed to strong real GDP growth and higher asset prices, we believe it has also diminished financial stability to some extent,” S&P said in a statement.
While downgrading China also means that India is a step closer to China’s rating, the gap is still huge. S&P has maintained its BBB- rating on India since January 2007, and between BBB- and A+, the difference is of five notches. This difference is not reflected just in S&P ratings. In May this year, Moody also downgraded China’s sovereign rating by one notch from A1 from Aa3, but its India rating at Baa3 rating was again five notches below China’s.
India, despite trying hard to make its case, hasn’t been able to secure a sovereign credit rating upgrade. Three well-known ratings agencies, Standard & Poor’s, Fitch and Moody’s have not changed their ratings on India for at least over a decade. Moody’s has kept its Baa3 rating on India since January 2004; Fitch has kept India at the lowest investment grade rating of BBB- since August 2006; while S&P has maintained its BBB- rating on India since January 2007.
Most ratings agencies had declined to factor in various government reforms of the last two-years saying that the desired effects were yet to be seen. Fitch acknowledged that Prime Minister Narendra Modi’s government remains committed to continued reforms rolled out over the last three years, but said that the impact of the reform programme on investment and real GDP growth will depend on how it is implemented.
Similarly, Moody’s had expressed concerns over India’s high debt burden in comparison to the other countries with similar rating, and the country’s low debt affordability, Reuters had reported citing correspondence between India’s Finance Ministry and the ratings agency.