BEIJING • Global ratings agency Standard & Poor's (S&P) cut its outlook for China's sovereign credit rating yesterday to negative from stable, but maintained the rating at AA-, saying the government's reform agenda is on track but likely to proceed more slowly than expected.
The outlook downgrade follows a similar move by Moody's Investor Services early last month.
At the same time, S&P also downgraded the outlook for Hong Kong to negative, while reaffirming the financial hub's AAA rating.
"Our outlook revision on Hong Kong reflects our similar action on China... which reflected economic imbalances in China that are unlikely to diminish at the pace we previously expected," S&P said in a statement.
First Shanghai Securities strategist Linus Yip said in Hong Kong that investors need time to study the logic of S&P's downgrade to understand the implications.
The yuan weakened slightly in offshore markets after the S&P news but later steadied.
London-based Sun Global Investments chief investment officer Sanjiv Shah said: "This has been well flagged - a greater than expected slowdown and worries about very high levels of bad debt in the economy, especially with respect to loans to struggling industrial companies and property lending.
"However, it should be noted that China's rating is a high AA- and even if this eventually results in a downgrade, China is still likely to be an A+ credit, which is still much better than all emerging-market peers and many middle-income and developed countries," he added.
The Chinese government has grown increasingly active in trying to control the conversation over its economic outlook both at home and abroad, concerned that negative sentiment could encourage capital flight that would sabotage attempts to reinvigorate growth through investment.
Investors, both foreign and Chinese, have grown increasingly nervous as growth in the world's second-largest economy has cooled to a 25-year low.
This has raised questions about Beijing's ability to deliver on promised reforms such as shedding bad debt and reducing industrial overcapacity without setting off a financial crisis or a spike in unemployment.
Chinese stock markets remain subdued after a bone-rattling crash in the summer of 2015 that only recently showed signs of bottoming out, and money flowed out of yuan-denominated assets at record rates as the currency slid against the United States dollar last year.