Moody's Investors Service announced its downgrading of China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.
"The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economywide debt continuing to rise as potential growth slows," according to a Moody's statement. "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 economywide debt, and the consequent increase in contingent liabilities for the government."
Moody's said the change to a stable outlook "reflects our assessment that, at the A1 rating level, risks are balanced".
China's Ministry of Finance said Moody's used "inappropriate methods" that kept it from reflecting China's real financial situation.
The ministry criticized Moody's failure to give enough weight to reforms. China has made much headway in economic restructuring, with a focus on reduction of excessive production capacity and cutting corporate and government debt. It has also seen higher-than-expected year-on-year GDP growth of 6.9 percent in the first quarter of 2017, firming market expectations that it will meet its GDP growth target of about 6.5 percent this year.
"Although its rating was downgraded today, there's not much of a problem in the Chinese economy," said Lu Feng, an economics professor at the National School of Development, Peking University. "China's economy has become much more resilient."
"Moody's overestimates difficulties ... and underestimates the government's ability to deepen supply-side structural reform and appropriately expand overall demand," the finance ministry said.
The National Development and Reform Commission said on Wednesday that China's total debt level is about 256 percent of GDP, lower than that of major developed economies, which is 279 percent on average, according to the Bank for International Settlements.
It also said in a statement that China's overall debt situation is stable and controllable. China has a high savings rate and the proportion of its foreign debt to overall debt is low, indicating a low possibility for China encountering a systemic debt crisis, it said.
Moody's said China's direct government debt burden could rise gradually toward 40 percent of GDP by 2018 and closer to 45 percent by decade's end. "That is too pessimistic," said Huo Zhihui, deputy director of rating technology at China Bond Rating Co. "Our estimates show that China's overall debt ratio will not reach 40 percent because China has imposed strict restrictions on government debt issuance," he said.
Huo said China's overall direct government debt ratio has dropped to 36 percent from 39 percent in 2014 and, given strict control of debt, the possibility is slim that the ratio will rise significantly.
