China Is Right to Tame Credit Growth: Moody’s

China's central bank is right to tame high credit growth in the world's second largest economy and not doing so would have long-term negative consequences, a senior official at credit ratings agency Moody's Investors Service told CNBC on Wednesday.

A credit squeeze in Chinese money markets that has fueled worries about the outlook for China's economy has dealt a blow to financial markets this week. On Tuesday, the People's Bank of China (PBOC) aimed to soothe the concerns by saying it would guide rates to reasonable levels.

(Read More: Is China Right to Brush Aside Credit Squeeze?)

"Our take on this is that the PBOC will continue to be vigilant on reining in credit growth," Thomas Byrne, senior vice president at Moody's told CNBC Asia's "The Call."

"This is one of the weaknesses we've identified in recent rating actions and it is very important because if credit growth gets out of control that has negative ramifications for China's economic growth," he added.

Moody's in April lowered its outlook for China's sovereign ratings to stable from positive, citing concerns about excessive local government borrowing. Earlier this week, the ratings agency lowered its outlook for Hong Kong's banking system to negative from stable given an exposure to Chinese lenders.

One concern for China watchers is that the high credit growth has been fueled by China's shadow banking system. While Byrne thinks shadow banking has a role to play in a developed economy, there are risks associated with it.

(Read More: This Worries Us Most About China, Says World Bank)

"When the economy doesn't just rely on the formal banking system for credit, that is healthy - it's an important feature of mature economies," he said.

However, Byrne added: "Our definition of the shadow banking system is that it's loosely regulated, it's non transparent and there's elevated credit risk and those are the three risks that the PBOC is focused on."

— By CNBC.Com's Dhara Ranasinghe, Follow her on Twiiter: @DharaCNBC