HONG KONG (AP) — Rating agency Moody's cut its credit rating for China on Wednesday, citing slowing economic growth and rising debt that it says will erode the country's financial strength.
Moody's said that it is downgrading its long-term rating for China one notch to a still robust A1 from Aa3.
The new rating will likely raise borrowing costs, though it is still the fifth highest on Moody's investment grade scale.
The agency warned that China's economy-wide debt is expected to rise further over the coming years while the government's direct debt burden rises to 45 percent of the economy by 2020 from about 40 percent in 2018.
Moody's said Beijing's economic reform program won't suffice to offset the rising debt level, given the authorities' tendency to use debt-fueled stimulus to spur growth.
"The planned reform program is likely to slow, but not prevent, the rise in leverage," Moody's said. "The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole."
However, the agency changed its outlook to stable from negative, saying risks are now balanced and growth will likely remain relatively strong.
Moody's expects China's economy, the world's second biggest, to continue gradually slowing, with potential economic growth declining to close to 5 percent over the next five years. Growth hit 10.6 percent in 2010 before sliding to a near-three decade low of 6.7 percent last year.
The rapid rise in Chinese debt since the 2008 global crisis has prompted warnings it will drag on growth and threaten banks. Beijing has cited reducing financial risk as a top priority this year but private sector analysts say it is moving too slowly in clearing away a backlog of nonperforming loans.