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Getty Images Global ratings agency Fitch cut China's long-term local currency credit rating to A-plus from AA-minus on Tuesday with a stable outlook, citing financial risks from rapid
credit expansion alongside the rise of shadow banking activity. China has seen rapid credit expansion as a result of Beijing's stimulus in 2008-09 to counter the global crisis, with the
stock of bank loans to the private sector hitting 135.7 percent of gross domestic product at end-2012, the third-highest of any Fitch-rated emerging market, the ratings agency said. (_Read
More_: CHINA INFLATION DATA SHOW 'RECOVERY NOT SECURED') Total credit in the economy including various forms of "shadow banking" activity may have hit 198 percent of GDP
at end-2012, up from 125 percent at end-2008, it added. Fitch said that the percentage of funding coming from bank loans is declining. It estimated that only 55 percent of China's new
social financing - which includes bank credit as well as corporate bonds and trust loans - came from bank loans in the 12 months ended February 2013, down from 76 percent in 2009. "The
proliferation of other forms of credit beyond bank lending is a source of growing risk from a financial stability perspective," Fitch said. (_Read More_: CHINA SERVICES PMI — NOT AS
GOOD AS IT LOOKS?) Chinese regulators have shown greater concerns over potential risks from off balance-sheet banking activity. China's banking watchdog has ordered banks to strengthen
checks on the underlying assets of a range of wealth management products to ward off potential risks to the financial system. "Definitely the systemic financial risk in China has been
increasing steadily in the past two years," said Wei Yao, China economist at Societe Generale in Hong Kong. (_Read More_: CHINESE BANK STOCKS DUMPED ON TIGHTER REGULATIONS) "This
shadow banking issue could be the trigger for a hard landing or make the situation worse if Chinese growth starts to decelerate; it's one of the weakest links in the economy," she
said. Yao said signs of local government involvement in shadow banking could only fuel financial risks. (_Read More_: FED STUDY SAYS CHINA'S GROWTH COULD SLOW SHARPLY BY 2030) Fitch
said its calculations showed that China's overall level of general government debt stood at 49.2 percent of GDP at the end of 2012, roughly in line with the A-grade median of 51.2
percent. "China's public indebtedness is therefore not a weakness, but neither is it a strength relative to rated peers, underscoring the case for equalizing the foreign currency
and local currency ratings," the statement said. But the ratings agency affirmed the country's long-term foreign currency ratings at A-plus, backed by the strength of China's
foreign exchange reserves, the world's largest. At the end of 2012, the reserves were $3.31 trillion. There is growing evidence that the world's second-largest economy is moving
towards a more sustainable consumption-led growth path, Fitch added.