After lowering China’s credit ratings outlook to negative in March of 2016, Moody’s has now cut the country’s credit rating to A1 from Aa3. Moody’s cited a likely rise in China’s debt as the culprit. Bloomberg reports:

Stocks and the yuan slipped in early trading after Moodyโ€™s reduced the rating to A1 from Aa3 on Wednesday, with markets paring losses in the afternoon. Moodyโ€™s cited the likelihood of a โ€œmaterial riseโ€ in economy-wide debt and the burden that will place on the stateโ€™s finances, while also changing the outlook to stable from negative.

Itโ€™s โ€œabsolutely groundlessโ€ for Moodyโ€™s to argue that local government financing vehicles and state-owned enterprise debt will swell the governmentโ€™s contingent liabilities, according to a response released by the Ministry of Finance. The ratings company has underestimated the capability of the government to deepen reform and boost demand, the ministry said.

It wouldnโ€™t be the first time a rating company was behind the curve, nor is such pushback unique — U.S. Treasury officials questioned the credibility of a 2011 downgrade from Standard & Poorโ€™s. Still, the move underscores broader doubts over whether President Xi Jinpingโ€™s government can simultaneously cut excessive leverage and steady growth, all with a twice a decade reshuffle of top party posts looming later this year.

โ€œIt is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures,โ€ said Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen. That said, โ€œit doesnโ€™t matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are international investors.โ€

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Why Moody’s Downgraded China to A1