Moody’s downgraded China credit from A1 to Aa3 on expected slower growth and rising debt

Moody's Investors Service downgraded China's credit ratings on Wednesday for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.

The one-notch downgrade in long-term local and foreign currency issuer ratings, to A1 from Aa3, comes as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fueled stimulus.

have stepped up efforts over the last several months to curb debt and housing risks, and a raft of recent data has signaled a cooling in the economy, which grew a solid 6.9 percent in the first quarter.

China's potential economic growth was likely to slow toward 5 percent in coming years, but the cooldown is likely to be gradual due to expected fiscal stimulus, Moody's said.

"Our GDP will keep medium- and high-level growth and that will provide fundamental support to fend off local government debt risks," China's Finance Ministry said. "China's government debt risks will not change dramatically in the period of 2018-2020 from 2016."

Moody's said it expects the government's direct debt burden to rise gradually toward 40 percent of GDP by 2018 "and closer to 45 percent by the end of the decade".

A growing number of economists believe that a massive bank bailout may be inevitable in China as bad loans mount.