SHANGHAI — Moody’s Investors Service cut China’s sovereign credit rating for the first time in nearly three decades, citing expectations that the country’s financial strength will deteriorate in the coming years as debt keeps rising and the economy slows.
In a Wednesday statement, Moody’s said it downgraded China’s rating to A1 from Aa3, while changing its outlook to stable from negative. In March of last year, it cut China’s outlook to negative from stable. Moody’s last cut its China credit rating in November 1989, not long after the bloody crackdown on mass protests in Beijing’s Tiananmen Square rocked the nation. Moody’s now rates China’s credit alongside that of countries such as Japan, Saudi Arabia and Israel.
The news triggered an early selloff in Chinese stocks, with shares in Shanghai SHCOMP, -0.52% falling more than 1% before recovering, in addition to modest losses for the Chinese currency in the freely traded offshore market. The impact on the heavily-controlled domestic currency and bond markets was muted.
The move comes as Beijing has intensified a campaign in recent months to rein in risky investment and financing practices that pose a serious threat to the stability of the world’s second-largest economy. The People’s Bank of China has raised a suite of key short-term interest rates twice since early February, while the banking regulator cracked down on investment products with highly leveraged bets in capital markets.
“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,” Moody’s said in the statement