China International Trust & Investment Corporation (CITIC), one of Beijing's largest investment arms, and the Bank of Communications had their ratings downgraded below investment-grade level to junk status, media reports said. Ratings on three of China's largest four state banks - Bank of China, China Construction Bank and Industrial and Commercial Bank of China - were cut to the lowest investment grade.

The US-based Standard & Poor's said the downgrades were triggered by China's slowing economic growth and corporate restructuring which had made the domestic operating environment increasingly difficult for financial institutions. The outlook on each institution's long-term rating was revised to negative, Hong Kong's South China Morning Postreported, quoting S&P.

The five had been on the credit watch list for possible downgrades since December 18. The agency warned that further downgrades were possible if their financial performances deteriorated in the future.

It said China's economy was suffering from weak domestic demand and mounting deflationary pressure despite repeated efforts by authorities to cut interest rates and boost infrastructure spending. "The strain will accentuate the existing problems of excess inventory and industrial capacity and declining profits facing state-owned enterprises, which are the major borrowers at the Chinese financial institutions," the agency said.

"The negative trend, which will likely to continue over the coming year, has already begun to squeeze profits and boost non-performing assets," the agency said. Chinese officials have already said this year's economic growth was likely to be lower than the gross domestic product (GDP) growth rate of 7.8 per cent recorded for last year.

Premier Zhu Rongji,who is expected on Friday to unveil his economic development plans for the year, said over the weekend that he expected this year's economic growth rate to be at least seven per cent. Analysts said that S&P's downgrades would make it increasingly difficult for mainland banks and corporates to raise money on the international equity or debt markets.

This was particularly true for CITIC and Bank of Communications which saw their counterpart credit ratings and senior unsecured debt ratings downgraded to `BB plus' from `BBB'. According to S&P definitions, the BB category is below investment grade, reflecting significant speculative characteristics.

The confidence of foreign investors has already been hit by the sudden closure of Guangdong International Trust and Investment Corp (GITIC), one of China's largest investment companies.