CHINA'S development drive yesterday received a setback following the downgrading of the international credit rating of its four biggest banks. Moody's Investor Service, a United States rating company which announced the regrading at the end of a seven-month investigation, also warned that the China International Trust and Investment Corporation (CITIC), the mainland's flagship investment company, was under review. Chinese monetary authorities criticised the move which will make the cost of borrowing money from international institutions more expensive. The US rating company lowered to Baa1 from A3 the long-term bond ratings of the Bank of China, Bank of Communications, People's Construction Bank of China and Industrial and Commercial Bank of China. These banks combined make up half of the country's financial industry with combined assets of about US$641 billion (HK$4,950 billion). They have been the financial powerhouse behind development programmes ranging from agriculture to commercial credit. Last year alone Bank of China, a major conduit for offshore capital-raising, borrowed 15 billion yen, a total of US$500 million through two deals, and 300 million marks. Moody's will review the A3 rating of CITIC, the state-run investment conglomerate, and downgraded the long-term rating of Guangdong International Trust and Investment Corporation, a regional state-owned conglomerate, to Baa2 from A3. Moody's said the downgradings result from the Government's plans to transform state banks from development institutions into commercial operations. The breaking of the link with the Government creates concerns it might not rescue the banks if they hit problems. Ratings are based on the ability of an institution to make principal and interest payments on its debt. Andrew Fung, a manager for swaps and trading with HSBC Markets, said: 'The downgrade by Moody's is an adjustment to the transformation from policy banks to commercial banks. 'The future state of these banks will be like Credit Lyonnais, a government-owned commercial bank with a Western standard profit and loss account.' The downgraded institutions will now have to pay more to attract the same level of borrowing because of a perceived higher risk by investors. The extent of the increase will vary depending on market conditions for new loans but the markets had anticipated the change and re-rated the risk for existing debt. For example, the three-year Bank of China US dollar floating rate notes were trading at LIBOR - the rate at which banks lend to each other - plus 60 basis points yesterday, a 33 per cent increase since January. But senior Bank of China officials are today expected to try to salvage a proposed record-breaking attempt by the Bank of China to raise HK$5 billion undermined by the lower rating. Bank of Communications general manager (international banking) Tao Shenchang said: 'Our overall financial standing today is much healthier than last October when Moody's began assessing us.'