Moody's cuts ratings of 26 Chinese state firms

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The agency lowered China's sovereign rating by one notch to A1 from Aa3, putting it in the same category as countries such as Japan and Israel.

"Taken together, we expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China's credit profile which is best reflected now in an A1 rating".

China's main stock indexes recouped earlier losses to end roughly flat on Wednesday, as strong gains in small-caps partially offset Moody's downgrading of China's debt ratings.

A ministry statement said the downgrade was based on a pro-cyclical approach which was "not appropriate".

Leaders in China have identified containing financial risks and its asset bubbles their top priority in 2017.

China's GDP rose 6.9% in the first quarter, slightly beating market expectations.

Like China, India has also expressed concerns about "inappropriate methodology" used by credit ratings agencies.

The outlook for China was changed from stable to negative.

The rating agency further stated that with GDP growth estimated to gradually erode over the coming years, the world's second largest economy would grow increasingly reliant on fiscal stimulus.

Moody's changed its outlook on China from stable to negative in March 2016.

UOB economist Suan Teck Kin said Moody's view of slowing growth in China "appears to be overly pessimistic".

SHANGHAI China stocks fell more than 1 percent before recouping some of the losses incurred on Wednesday morning in the wake of Moody's downgrading of China's debt ratings - aggravating a market already anxious by tighter regulation, rising borrowing costs and signs of an economic slowdown.

Moody's has warned China for its slowing economy and rising debt.

The Chinese economy expanded by 6.7 per cent in 2016 compared with 6.9 per cent in 2015, the slowest growth since 1990. He said credit default swap for China's five-year government debt maintains at around 80 basis points this year - the figure once jumped as high as 150 basis points in previous years.

China's economy has been fueled since the 2008 financial crisis by unregulated and risky lending tied to state-owned banks and enterprises, leading to a pile of questionable and murky debt.

Fears are mounting that China is flirting with a potential disaster worse than the U.S. sub-prime collapse that sparked the global financial crisis, and Japan's 1990s asset-bubble meltdown and resulting "lost decade".