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Moody's Investors Services slashed China's long-term local and foreign currency issuer ratings, citing its expectation that the country's financial strength will weaken in the coming years as its massive debt begins to seep into the economy's growth.
In a statement, Moody's said the downgrade shows the rating agency's expectation that China's financial integrity will erode over the coming years, as economy-wide debt which continues to rise and potential growth slumps.
The credit rating cut comes as the government tackles the challenge of slowing economic growth and increasing financial risks resulting from surging debt.
Moody's said that while the ongoing development of implemented reforms will transition the economy and financial system gradually, it said it will likely not be sufficient to avoid additional tangible increase in debt and the relative increase in contingent liabilities for the state.
Despite the the downgrade to an A1 rating from Aa3, Moody's lifted China's outlook from negative to stable.
The rating downgrade positioned Chinese stocks for one of the biggest one-day decline this year. The Shanghai composite index slid over 1 percent in early trade, while the offshore yuan briefly fell by almost 0.1 percent versus the greenback after the ratings agency published its decision. The Aussie, often viewed as a liquid proxy for China risk,was also hit by the downgrade.
