POINTING to problems masked by China's apparent success at lowering inflation while maintaining economic growth, Thomson BankWatch has downgraded its sovereign risk rating. In a hard-hitting report released yesterday, the United States-based credit rating agency cut the mainland's rating from A-to BBB+. The rating is still above its investment grade minimum of BBB-, meaning that the move is unlikely to affect the marketability of debt issued by Chinese banks. 'While acknowledging the Government's apparent success in engineering a 'soft landing' for the overheating economy, we remain concerned over a number of underlying problems that continue to pose obstacles to meaningful economic reform,' the company said. 'Taken together, these economic and social challenges will sorely test the Chinese leadership at a time of increasing political uncertainty over the transition to the post-Deng era,' its report added. Those problems include: The boom-bust nature of the economy. Lingering inflationary pressures could resurface if price and credit controls were relaxed. Structural inefficiencies in the state sector. The shortage of government revenue, which limits the Government's ability to assume the social burden of state enterprises and provide capital. Rising unemployment. A relatively high proportion of bad loans in the banking sector. A widening income gap between coastal and inland provinces, compounded by difficulties in reforming agriculture. The credit rating agency's report comes a few days after premier Li Peng applauded Beijing's success at cutting economic growth to 10.2 per cent, from 11.8 per cent, and inflation to 14.8 per cent, from 21.7 per cent, at the National People's Congress. Mr Li further demanded that growth slow to an average of eight per cent for the next five years, with the inflation rate below that. Thomson BankWatch Asia president Philippe Delhaise said yesterday that the downgrading would not affect the agency's issuer ratings for individual Chinese banks.