Moody's has downgraded China's credit rating over slowing economy concerns causing Chinese stocks to fall

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While China's GDP is set to remain large, potential growth is likely to fall in the coming years (Source: Getty)

Moody's has downgraded China's credit ratings for the first time in more than 25 years, forecasting the financial strength of the economy to deplete as growth slows and debt rises.

The ratings agency brought China's long-term local currency and foreign currency issuer ratings down a notch from A1 to Aa3. It also changed its outlook for China to stable from negative.

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In a statement, Moody's said the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows".

The downgrade gave Asian stocks some cause for concern, with China's Shanghai Composite index falling more than one per cent before paring losses, while MSCI's broadest index of Asia-Pacific shares outside Japan dipped 0.3 per cent. The downgrade could also raise the cost of borrowing for the Chinese government.

China's finance ministry said Moody's was exaggerating the mainland's economic difficulties and underestimating reform efforts. 

The Chinese economy expanded by 6.7 per cent last year, compared to 6.9 per cent in 2015, which was the slowest growth rate noted since 1990.

Moody's said:

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.

Earlier this month, the International Monetary Fund (IMF) revised up its forecasts for growth in both China and Japan.

China’s GDP will grow by 6.6 per cent this year, the IMF said, 0.4 percentage points higher than their previous forecasts. China’s government is targeting growth of around 6.5 per cent, which is its lowest target in more than 20 years.

The IMF did note risks remained to growth after China's government encouraged a big build-up of borrowing to sustain the nation's growth rate after the global financial crisis.

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