Stocks across Europe are dipping after China's rating cut

Moody's also forecast that China's growth potential will decline to about 5 per cent in the next five years, for reasons including a smaller working age population and a continuing productivity slowdown.

As a effect, Moody's expects the government's direct debt burden to rise slowly towards 40% of GDP by 2018 and closer to 45% by the end of the decade, while other fiscal risks will rise from issues including high levels of off-book local government borrowing.

This is likely to make the economy increasingly reliant on policy stimulus, which could in turn exacerbate rising debt levels, it added. But China's Finance Ministry accused the agency of using "inappropriate methodology" that had resulted in the country's economic problems being overestimated, while underestimating the government's economic reform programme.

"We expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China's credit profile", Moody's said in a statement.

Western institutions and media reports have since past year repeatedly referred to China's credit risks.

The stable outlook reflects Moody's assessment that, at the A1 rating level, risks are balanced.

China's leaders have identified the containment of financial risks and asset bubbles as a top priority this year. Following the downgrade, China's five-year credit default swaps widened only 2bps while the CNY weakened 0.5 per cent against the United States dollars.

This was a good week for Moody's to express its concern about China's mounting debt in credit downgrades: concern about China's weakness subsided as commodity prices stabilized over the past two weeks.

It last downgraded the country in 1989.

"The planned reform program is likely to slow, but not prevent, the rise in leverage", Moody's said. Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of GDP.

Also, as per the report, India's revenues at 21 per cent of GDP are considerably lower than the median income of countries with the BAA ratings: 27.1 per cent.

Earlier on April 9, 2013, Fitch Ratings downgraded China's long-term local currency rating to A+ from AA-, the first sovereign rating cut since 1999.

Major stock indexes across the European continent are dragging on Wednesday, pulled lower by news overnight that China's credit rating has been cut by ratings agency Moody's.

"In recent years, rating agencies have maintained India's BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance)", India's Chief Economic Advisor Arvind Subramanian said, PTI reported.