Moody's downgrades China's rating; changes outlook

By Ovunc Kutlu

NEW YORK (AA) - Moody's downgraded China's rating to A1 from Aa3 but changed its outlook to "stable" from "negative", the global credit rating agency announced late Tuesday.

"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," the agency said in a statement.

China's outlook was upgraded to stable because of its strong credit profile that makes China resilient against negative shocks, the agency said.

GDP growth in China peaked at 10.6 percent in 2010, before falling to 6.7 percent last year. Moody's said it expects China's economic growth potential to decline to around 5 percent over the next five years because of three reasons.

The agency said capital formation in China is expected to slow as investments have a lower share in total expenditure. The fall in the working age population is anticipated to accelerate. And a slowdown in productivity in recent years is not expected to go away.

Moody's warned that China's credit rating could be again lowered if there is "significant misallocation of capital that weighs on growth in the medium term".