Shadow banking sector now 60% of China’s GDP

Fitch Ratings warns shadow banking is stoking instability in the banking sector.

Fitch’s said its recent downgrade of China's long-term local currency rating last week to A+ from AA- was due to the structural weaknesses in China's economy; an expansion of easy credit and the rise of an opaque shadow banking system.

Fitch said credit issued by Chinese banks to the private sector in 2012 reached 136% of GDP, the third highest level of any emerging market country it rated.

Most of the debt went to local governments, and was used to finance infrastructure projects that helped China sustain rapid economic growth despite the financial crisis.

Fitch, however, believes local government debt levels are now so high that Beijing will be forced to assume some or much of the burden. It said there is so little transparency over where the money is going.