Moody's Investors Service Wednesday lowered the outlook on China's credit rating from stable to negative, citing a weakening of fiscal metrics and a continuing fall in foreign exchange reserves.

The rating agency also noted uncertainty over the capacity of authorities to implement the reforms needed to address imbalances in the world's second-largest economy.

Moody's current Aa3 rating on China is seven notches above junk so even if the agency were to follow up on its warning and lower the rating, investors won't have to suddenly start selling the country's bonds.

Still, the warning underscores how the build-up in credit in the country's stuttering economy is making market observers nervous.



Rival Standard & Poor's assesses China's creditworthiness at similar levels to Moody's, while Fitch rates China a notch lower. S&P and Fitch both have stable outlooks on the country.

Chinese markets did not immediately react to the outlook revision. The Shanghai composite was near flat at 2,735.21,while the dollar/yuan rate was at 6.5518 against Tuesday's close of 6.5500. The bid yield on China's benchmark 10-year local currency bond was steady at 2.91 percent.

Moody's noted that government debt had risen from 32.5 percent of gross domestic product (GDP) in 2012 to 40.6 percent at the end of 2015.

Moody's forecasts the metric to rise further to 43 percent of GDP by 2017 as Beijing spends more to revive growth that has slowed to the lowest in over two decades.