The ratings agency Moody's has cut its assessment of China's creditworthiness for the first time in 30 years after flagging concerns over the country's financial strength.

Moody's downgraded China's credit rating by one notch, from Aa3 to A1, while also changing its outlook from "negative" to "stable".

The downgrade means that, where Moody's previously regarded China as having a "very strong" capacity to meet its financial commitments, it now believes the country is merely in a "strong" position to do so and is slightly more at risk from changes in economic conditions.

Explaining its decision, Moody's said the downgrade reflected its "expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows".

It added: "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 economy-wide debt and the consequent increase in contingent liabilities for the Government."


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The decision from Moody's follows growing concern among investors over the levels of debt building in the Chinese economy.

The country's debt to GDP ratio stands at more than 250%, one of the highest in the world, reflecting attempts by Beijing to continue pump-priming its economy and maintain growth and job creation as millions move from the countryside to make their fortunes in the cities.

There have also been concerns about the levels of debt building up in the private sector, particularly among the banks, which have lent money to businesses that, in some cases, they are unlikely to be repaid.

Increasing signs of a house price bubble in some major cities have added to fears.

Homes in major cities such as Shanghai and Beijing shot up in value by 25% or more between 2015 and 2016, with the increases spreading to smaller cities by the middle of last year, although there have been signs more recently that the breakneck rise in prices is slowing after attempts by the authorities to restrict the availability of credit.

However, in justifying its downgrade, Moody's said it expected that borrowing levels would continue to increase in coming years, with planned reforms by the government likely to slow rises in the level of indebtedness, but not bring it to a halt.

The ratings agency went on: "While China's GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years.

"The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus.

"At least over the near term, with monetary policy limited by the risk of renewing capital outflows, the burden of supporting growth will fall largely on fiscal policy, with spending by government and government-related entities - including policy banks and state-owned enterprises - rising."

Investors reacted calmly to the news.

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Yields on Chinese government bonds, which rise as the price falls, briefly edged higher before finishing largely unchanged.

The main stock index, the Shanghai Composite, finished the session 0.06% higher.

On currency markets, the yuan traded marginally lower against the US dollar, while the Australian dollar, which is often seen as reflecting China's prospects due to the ties between the two countries, also slipped against the greenback.

Luc Froehlich, head of investment directing in Asian bonds at 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."

The A1 rating remains the fifth strongest that Moody's can give a country's creditworthiness.

The UK's creditworthiness is currently assessed as Aa1 by Moody's, which is its second-strongest credit rating.