Moody's cuts China's rating on debt concerns

Moody's ratings agency downgraded China's credit score on Wednesday, warning that economy-wide debt is expected to rise as potential economic growth slows over the coming years.

The agency lowered China's long-term local currency and foreign currency issuer ratings to A1 from Aa3, but said its outlook changed from "negative" to "stable".

"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 agency said.

The downgrade comes as China has launched efforts to clean up a toxic brew of unregulated and risky lending increasingly viewed as a threat to global financial stability.

But analysts have expressed scepticism about Beijing's willingness to quit its debt addiction since freewheeling credit conditions have underpinned the growth China's Communist Party relies on for political legitimacy.

The government has trimmed its 2017 gross domestic product target to around 6.5 percent.

Chinese stocks fell in early trading after Moody's announced the downgrade, with the benchmark Shanghai Composite Index falling 1.01 percent, or 31.01 points, to 3,030.94.

The Shenzhen Composite Index, which tracks stocks on China's second exchange, lost 1.08 percent, or 19.24 points, to 1,770.23.

Hong Kong stocks also fell at the start of trading.

- Stable outlook -

Despite concerns, Moody's upgraded China's negative outlook.

"The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced," it said in its ratings note.

"The erosion in China's credit profile will be gradual and, we expect, eventually contained as reforms deepen," Moody's said.

"The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account."

But the ratings agency said it still expects China's growth potential to decline to close to five percent over the next five years, citing a slowdown in capital stock formation, an accelerated fall in the working age population and a continuing dip in productivity.

Fears are mounting that China is flirting with a potential disaster worse than the US sub-prime collapse and subsequent 2008 financial crisis, and Japan's 1990s asset-bubble meltdown and resulting "lost decade".

China's banking regulator recently unveiled measures to rein in dangerous lending, tighten balance sheets and strengthen institutional transparency and chronically weak internal controls.

Moody's had estimated in October that China's "shadow banking" sector -- off-balance-sheet lending that evades official risk supervision -- totalled $8.5 trillion, or nearly 80 percent of its GDP.