The move brings the ratings across the three major credit rating firms in line; Fitch cut China's rating in 2013, while Moody's did so just last May.
The Chinese yuan was weaker against the USA dollar, but the decision had little market impact; the iShares China Large-Cap exchange-traded fund (FXI) was up 0.6% in pre-market trading, while the Guggenheim China Technology ETF (CQQQ) moved fractionally lower overnight. In any case, the bulk of China's government debt is bought by state-owned banks and held to maturity, the economist noted.
The IMF expects China's total non-financial sector debt as a proportion of gross domestic product to rise to nearly 300% by 2022, up from 242% a year ago.
The Chinese economy expanded at a 6.9 percent rate in the first half of the year, according to official statistics. "The downgrade decision is likely to have limited impact on capital inflows as well".
Market reaction to the move, which was released after China's stock markets closed, was muted.More news: S&P downgrades Pennsylvania credit to A-plus, cites budget problems
S&P said that recent efforts by the government to reduce corporate leverage could stabilise financial risks in the medium-term.
S&P pointed to the "prolonged period of strong credit growth" raising the prospect of economic and financial risks to the country.
S&P moved China to negative outlook in March 2016. "We also expect credit growth in China to outpace that of nominal GDP over much of this period".
Helena Huang, China economist at ICBC Standard Bank, said: "Though without any near-term credit risks amid Beijing's recent regulatory tightening and deleveraging efforts, the key uncertainty still rests in the longer term on Beijing's capability to resolve its debt conundrum".
Regulators are making significant inroads in reducing interbank borrowing - perhaps the most pressing risk - and have curbed some riskier types of shadow banking. Total debt has quadrupled since the financial crisis to hit $28tn (£22tn) at the end of previous year.