The agency's comments in an Asia-wide assessment of the banking sector come as concerns mount 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.

“Credit growth of more than 50 percent over a two-year period in an economy where bank credit is already quite large relative to gross domestic product almost inevitably involves some misallocation of credit,” it added.

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

Fitch however noted the limited transparency of Chinese banks and said their tendency to reschedule loans meant any bad debt problems would surface slowly.

On Tuesday, Fitch downgraded China Merchants Bank and China CITIC Bank to 'D' from 'C/D' given “both banks' noticeable deterioration in capital and rising on and off-balance-sheet credit risk in the wake of last year's very rapid loan growth.”