Moody's Investors Services downgraded China's long-term local and foreign currency issuer ratings on Wednesday, citing expectations that the financial strength of the world's second-biggest economy would erode in the coming years.
The downgrade by one notch to an A1 rating from Aa3 comes as the Chinese government grapples with the challenges of slowing economic growth and rising financial risks stemming from soaring debt.
"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 in a statement.
"While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government," it said.
Government-led stimulus has been a major driver of economic growth over recent years, but the pump-priming has also been accompanied by runaway credit growth and has created a mountain of debt - now standing at nearly 300 percent of GDP.
Moody's said it expects the government's direct debt burden to rise gradually toward 40 percent of GDP by 2018 "and closer to 45 percent by the end of the decade".
Economy-wide debt of the government, households and non-financial corporates would also continue to rise, it said.
Reference: Reuters
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