Shares of nine metal and mining companies fell by 0.68% to 3.36% at 14:10 IST on BSE after global credit rating agency, Moody's Investors Service cut China's sovereign credit rating for the first time in almost three decades.
Moody's said it expects the government's direct debt burden to rise gradually towards 40 percent of GDP by 2018 "and closer to 45 percent by the end of the decade".
The rating agency said late Wednesday that it's lowering its local currency and foreign currency issuer ratings by one notch to Aa2 from Aa1. Moody's last downgraded China's rating in 1989, months after the Tiananmen Square Protests.
The downgrade is a reflection of the expectations by Moody's that the financial strength of China's economy will erode as debt mounts across the economy due to a potential for growth to slow, said the ratings agency in a prepared statement.
China's Finance Ministry responded to the downgrade, stating that Moody's outlook is based on "inappropriate methodology".
In the meantime, China's leaders have identified the containment of financial risks and asset bubbles as a top priority for the year, even at the expense of some reform programs. Whilst acknowledging that reforms on the financial system are being implemented, the agency said it is unlikely to prevent a further material rise in economic debt and government liabilities.
Meanwhile, growth in the world's second largest economy has dropped from 14.2% in 2007 to 6.7% previous year.
As the growth of the old Western economies, particularly the US and Europe, has slowed and the negative growth of Japan, once the world's second largest economy, has persisted, China has become the engine of the global economy.
China's credit rating has been downgraded for the first time in nearly three decades, fuelling fears that slowing growth and rising debts will weaken the world's second-largest economy.
Moody's changed its outlook on China from stable to negative in March 2016.
The downgrade will have an impact on the cost of borrowing for China's government and its SOEs.
Moody's said that China's growth rate will slow to 5% in the coming years, although at a gradual pace thanks to the expected government fiscal stimulus.
In reaction to the Moody's downgrade, analysts at Nomura predicted that high debt levels and other financial risks will contribute to a slowdown in China's growth in the years ahead. While CIMB's Song Seng Wun noted that "I don't think it's going to be earth-shattering or shift investors' sentiment toward China", and "Everyone on the planet has flagged the risk of Chinese debt and the risk that is associated with the current policymakers' strategy and attempt to deleverage".