Credit agency Moody's lowered China's foreign currency and long-term local credit rating by one notch to A1, citing slowing growth and mounting debt in the world's second-largest economy.
The downgrade sent shivers among emerging markets on Wednesday. However, stocks later clawed back losses and hopes of an extension to an OPEC crude supply deal supported the currencies of some oil exporters.
Asian markets were initially shaken sending China mainland benchmark stock indexes more than 1 percent lower and weighing on the yuan. But Chinese stocks ended the session broadly flat, while the overall MSCI benchmark recovered to trade flat after suffering losses earlier in the session.
JPMorgan's benchmark emerging market debt index only ground marginally wider, with spreads over safe-haven U.S. Treasuries edging out one basis point.
"The reaction has been pretty muted," said Kaan Nazli, senior economist emerging market debt at Neuberger Berman, highlighting that recent China data had already contributed to a pullback on commodity focused emerging markets.
“The Chinese infrastructure programme was what helped push metals prices higher in the first quarter of this year and the last quarter of last year - there is an expectation that this has run out of steam," he added.
Moody' downgrade of China is just the latest to affect big emerging markets, with several recently having their outlooks or ratings cut.
Read more at Reuters.