Moody’s Investors Service downgraded China’s credit ratings for the first time in nearly 30 years on Wednesday.
It expects the financial strength of China’s economy will erode in coming years as growth slows and debt continues to rise.
The long-term local and foreign currency issuer ratings dropped from to A1 from A3. However, it still remains comfortably within the investment grade rating range.
The Chinese government is grappling with the challenges of rising financial risks stemming from years of credit-fuelled stimulus.
“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,” the rating agency said in a statement, changing its outlook for China to stable from negative.
Moody’s said it expects the government’s direct debt burden to rise gradually towards 40 percent of GDP by 2018 and “closer to 45 percent by the end of the decade.”
A growing number of economists believe that a massive bank bailout may be inevitable in China as bad loans mount.
China’s Finance Ministry said the downgrade was based on “inappropriate methodology.”
China’s Shanghai Composite index .SSEC fell more than 1 percent in early trade before paring losses, while the yuan currency in the offshore market CNH=D3 briefly dipped nearly 0.1 percent against the U.S. dollar after the news.
The Australian dollar AUD=, often see as a liquid proxy for China risk, also slipped.