Ratings agency Moody's on Wednesday cut its outlook on China's sovereign bonds from stable to negative, warning of increasing government debt and further capital outflows and questioning Beijing's ability to implement economic reforms.

The Chinese government's fiscal strength has weakened with borrowing increasing across the economy and financial system and stress mounting in state-owned enterprises, Moody's Investors Service said in a statement.

It said continued weak growth was likely to see liabilities mount at policy banks -- state-owned entities that fund projects according to government instructions -- as authorities pushed investment to boost economic expansion.

A negative outlook means that there is "a higher likelihood of a rating change over the medium term", Moody's says on its website -- and a downgrade of Chinese bonds would push up borrowing costs for Beijing in international markets.

The last time the US ratings agency revised its outlook on China's government bonds was in April 2013, when it lowered its vision to stable from positive but left the rating itself unchanged.

Moody's has rated Chinese bonds as Aa3, the fourth-highest investment grade, since November 2010.

Government debt jumped to 40.6 percent of gross domestic product (GDP) at the end of 2015 from 32.5 percent in 2012, Moody's estimated, forecasting it would rise to 43.0 percent by next year as policymakers increased government spending and cut taxes to support the economy.

China's economy grew 6.9 percent last year, its weakest rate in a quarter of a century, and concerns over its outlook have kept mounting.

But Moody's warned that fiscal and monetary policy support to achieve the government's economic growth target, which it expected to be set at 6.5 percent, "may slow planned reforms".

"Without credible and efficient reforms, China's GDP growth would slow more markedly as a high debt burden dampens business investment and demographics turn increasingly unfavourable," it said, adding government debt would "increase more sharply than we currently expect".

- 'Short-sightedness' -

China's foreign exchange reserves, the world's largest, fell to $3.2 trillion in January, the lowest in more than three years, official data have showed.

"Their decline highlights the possibility that pressure on the exchange rate and weakening confidence in the ability of the authorities to maintain economic growth and implement reforms could fuel further capital outflows," Moody's said.

But the agency kept China's credit rating at Aa3, citing the large size of buffers in the Chinese economy, including high domestic savings.

"In a largely closed financial system, buffer erosion would most likely be gradual, providing time to address key areas of reform," it said.

To prop up growth, China's central bank this week cut the amount banks must hold in reserve, freeing up more funds for them to lend.

Shanghai stocks closed up more than four percent on Wednesday as investors stormed into the market on hopes of further government measures to stimulate the economy.

"The ratings haven't been changed so I expect market reaction to initially be muted," said Andy Ji, a Singapore-based foreign-exchange strategist and economist at Commonwealth Bank of Australia, according to Bloomberg News.

Asked about the lowered outlook, Beijing's foreign ministry insisted that authorities were committed to reform.

"The Chinese economy has great potential, resilience and flexibility," foreign ministry spokesman Hong Lei told reporters, quoting a speech by Premier Li Keqiang.

But the official news agency Xinhua carried a bylined commentary denouncing Moody's for "short-sightedness" and questioning Western ratings agencies' "credibility, authority and significance".

"Moody's move reflects a lingering pessimism over the Chinese economy among some overseas institutions, a miscalculation due to a lack of vision on China's fiscal stability," it said.

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MOODY'S CORP.