A downgrade on China’s sovereign debt from an influential ratings agency weighed on the FTSE 100 in Wednesday morning trading as miners suffered.
Rio Tinto’s shares fell by more than two per cent, while Glencore dipped by more than one per cent at the time of writing.
Read more: Moody's has downgraded China's credit rating
Miners are exposed to China because the vast resources needs of the world’s second-largest economy make it a crucial factor in deciding the demand for minerals and metals.
The debt downgrade prompted a steep sell-off in commodities, with copper, silver, and gold prices all sliding.
Moody’s moved China’s debt rating from Aa3 to A1, meaning their analysts believe there is theoretically a higher chance of the country defaulting on its obligations.
The ratings agency said its downgrade reflects an “expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.”
High debt levels in the Chinese economy have worried economists for some time, with the country’s central bank attempting to tighten the money supply in recent months to stop the leverage build-up.
Chinese sovereign debt is still investment grade, meaning the impact will be limited, although it could raise borrowing costs for some Chinese debt issuers.
Luc Froehlich, head of investment directing, Asian fixed income, Fidelity International, said: “Today’s downgrade is yet another sign of the challenges faced by China, which is juggling rising leverage issues, declining economic growth rates and ongoing structural reforms.
“Despite these mounting pressures, we are confident that China’s central bank and its regulators are firmly in control of the situation. In particular, China’s recent regulatory tightening should help deflate the country’s credit markets and lead to long-term market stabilisation.”