China's fifth-largest state-owned bank has had its credit rating downgraded to junk status by Moody's, the latest sign of fragility in the country's financial system.

The decision to downgrade Bank of Communications was based on the lender's lack of customer deposits and over-reliance on expensive and volatile alternative sources of funding, Moody's said Thursday.

It follows a Chinese government crackdown on banks using excessive leveraging, including unregulated "shadow banking".

"Moody's review on BoCom was triggered by the bank's increasing reliance on wholesale funds in recent years and declining profitability," said the credit ratings agency in a statement Thursday.

The downgrade was driven by BoCom's "weaker funding profile when compared to other state-owned Chinese banks", particularly weaker deposit holdings, it said.

BoCom's baseline credit assessment was moved from baa3 to ba1 -- crossing the "junk status" threshold.

Chinese officials fear domestic banks' growing dependence on less stable funding sources such as the sale of financial products and interbank lending, rather than traditional deposits, could imperil economic growth and stability in the world's second-largest economy.

In March, the newly appointed head of China's banking watchdog pledged to end regulatory "chaos" in the country's banking system and cracked down on these instruments, limiting the availability and increasing the cost of financing sources on which BoCom depends.

The increase in funding costs was expected to put pressure on BoCom's profits, Moody's said.

Much of China's growth over the past decade has been underpinned by debt-fuelled investment in infrastructure and real estate, but has slowed in recent years.

BoCom is 41.26 percent owned by the Chinese central government. It is the country's fifth-largest lender by assets, although its holdings are considerably smaller than those of nation's famous "Big Four", which hold proportionately more deposits.

amz/amu

MOODY'S CORP.

BANK OF COMMUNICATIONS

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