Fitch cautions Chinese banks of huge ‘bubble risk’

The agency issued warning after it downgraded China Merchants and China CITIC over bad debt.

Fitch Rating’s comments in an Asia-wide assessment of the banking sector come as concerns that Chinese banks may be headed for trouble over bad debt after a record lending spree last year.

"The agency views 'bubble risk' as greatest for Chinese banks given their 32 percent loan growth in 2009; this looks likely to be followed by a further 20 percent in 2010," Fitch said in a statement.

Fitch downgraded on Tuesday China Merchants Bank and China CITIC Bank to 'D' from 'C/D' because of "both banks' noticeable deterioration in capital and rising on and off-balance-sheet credit risk following last year's very rapid loan growth, according to a report in China Post.

New loans extended by China's banks nearly doubled in 2009 from the previous year to 9.6 trillion yuan ($1.4 trillion) as banks complied with Beijing's calls to boost lending to keep the economy growing.