China's structural reforms would slow the pace of its debt build-up but would not be enough to arrest it, and another credit rating cut for the country was possible down the road unless it got its ballooning credit in check, officials at Moody's said.

The comments came two days after Moody's downgraded China's sovereign ratings by one notch to A1, saying it expects the financial strength of the world's second-largest economy to erode in coming years as growth slows and debt continues to mount.

In announcing the downgrade, Moody's Investors Service also changed its outlook on China from "negative" to "stable", suggesting no further ratings changes for some time.

China has strongly criticised the downgrade, asserting it was based on "inappropriate methodology", exaggerating difficulties facing the economy and underestimating the government's reform efforts.

The reforms might slow the pace at which debt was rising, but might not be enough to arrest the trend

In response, senior Moody's official Marie Diron said today that the ratings agency has been encouraged by the "vast reform agenda" undertaken by the Chinese authorities to contain risks from the rapid rise in debt.

However, while Moody's believes the reforms might slow the pace at which debt was rising, they would not be enough to arrest the trend and levels would not drop dramatically, Diron said.

China might no longer get an A1 rating if there are signs that debt was growing at a pace that exceeds Moody's expectations, Li Xiujun, vice president of credit strategy and standards at the ratings agency, said in the same webcast.

"If in the future China's structural reforms can prevent its leverage from rising more effectively without increasing risks in the banking and shadow banking sector, then it will have a positive impact on China's rating," Li said.

But Li added: "If there are signs that China's debt will keep rising and the rate of growth is beyond our expectations, leading to serious capital misallocation, then it will continue to weigh on economic growth in the medium term and impact the sovereign rating negatively."

Moody's expects China's growth to slow to around 5 percent in coming years, from 6.7 percent last year, compounding the difficulty of reducing debt. But Diron said the economy will remain robust, and the likelihood of a hard landing is slim.

Government-led stimulus has been a major driver of China's economic growth over recent years, but has also been accompanied by runaway credit growth that has created a mountain of debt – now at nearly 300 per cent of gross domestic product (GDP).

Some analysts are more worried about the speed at which the debt has accumulated than its absolute level, noting much of the debt and the banking system is controlled by the central government.

UBS estimates that government debt, including explicit and quasi-government debt, rose to 68 per cent of GDP in 2016 from 62 per cent in 2015, while corporate debt climbed to 164 per cent of GDP in 2016 from 153 per cent the previous year. (Reuters)