BEIJING - Fitch Ratings Inc's threat to downgrade China's rating in the next two years, concerning the risks in the country's banking system, will have a very limited impact on the country's overall financial stability, experts said.

Andrew Colquhoun, head of Asia-Pacific sovereign ratings at Fitch, was quoted by Reuters as saying that China's local currency debt rating could be downgraded over the next 12 to 24 months in case of "a material deterioration in bank asset quality".

But Xu Hongcai, deputy director of the information department at the China Center for International Economic Exchanges, a government think tank, said even a downgrade would not lead to a collapse similar to what Standard & Poor's (S&P's) downgrade did to the US.

"The investments in China are mainly in infrastructure that could drive further investment and consumption to support the government's repaying ability," Xu said, adding that the bad-loan rate is still relatively low to meet the Fitch's condition for a downgrade.

A report by Founder Securities showed that non-performing loans in listed banks have been decreasing in recent years, from 6.46 percent in 2007 to less than 1 percent at the end of June.

As for the possible rise in financing costs caused by the downgrade, Xu said the economy "would not be affected much by an overseas agency, considering the non-market interest rate and the fact that Chinese bonds are mostly domestically traded".

Xu gave Moody's Investors Service's downgrade of Japan's sovereign credit rating in late August as an example. The downgrade had little impact on the country's bond sales because 95 percent of the bonds are purchased by domestic investors.

China's long-term local currency rating is AA minus, Fitch's fourth-highest level, on a par with Italy and a notch below Spain, Reuters data show.

Fitch downgraded the outlook on China's long-term local currency debt from stable to negative in April because of concerns about the country's financial stability following a lending surge to help maintain economic growth during the global downturn.

"China's banking system is the largest, fastest-growing, but most thinly capitalized among emerging markets," Charlene Chu, head of Fitch's China Financial Institutions, said in late August. The economic recovery in China remains heavily dependent on loose credit, but continued elevated credit growth is also fuelling inflation and a property bubble, and contributing to a high rate of capital burn among banks which may lead to a future rise in delinquent loans.

Xu said the excessive liquidity is a result of investment to maintain economic growth amid a global downturn, like what other countries did. And sustainable growth should rely on booming domestic demand.

He Keng, vice-chairman of the Financial and Economic Committee of the National People's Congress, said Fitch's warning on the debt problem and property bubble touches on two of the major issues China faces. "But the government is already taking measures to strengthen the force of management of local governments' debt, and some have already shown initial success," He said.