SHANGHAI—Moody’s Investors Service has cut China’s sovereign credit rating, citing expectations that the country’s financial strength will deteriorate in coming years as debt keeps rising and the economy slows.

In a statement Wednesday, Moody’s said it downgraded China’s rating to A1 from Aa3. It changed its outlook to stable from negative.

The rating agency’s move comes as Beijing has intensified a campaign in recent months to rein in risky investment and financing practices that pose a serious threat to the stability of the world’s second-largest economy. The People’s Bank of China has raised a suite of key short-term interest rates twice since early February, while the banking regulator cracked down on investment products with highly leveraged bets in capital markets.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” Moody’s said in the statement.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” it added.

China’s total debt reached 253% of its gross domestic product last year, up from 213% in 2013 and 149% in 2008, according to J.P. Morgan.

Explaining the upward change in China’s ratings outlook to stable from negative, Moody’s said the move reflects its assessment that, at the new, lower A1 rating level, “risks are balanced.”

“The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen,” Moody’s said.

In the freely traded offshore market, the U.S. dollar was recently at 6.8843 against the yuan, up slightly from 6.8808 at Tuesday’s close.

Write to Shen Hong at hong.shen@wsj.com