Fitch warns of likely downgrade of China's yuan debt rating

China faces a "better than even chance" of a another downgrade on its local currency debt rating due to rising defaults, ratings agency Fitch Ratings said.

Last month, Moody's warned that China's local government debts may exceed the state auditors' estimates by a whopping $540 billion (3.5 trillion yuan). (See: Chinese banks could face negative credit outlook: Moody's)

Chinese banks had loaned huge sums to boost economic growth in the last two years creating growing concerns of bad loans leading Fitch to issue a warning earlier in the week that it may cut China's yuan debt rating on concerns of rising defaults.

Fitch's current rating for China's yuan-denominated debt currently stands at AA-  four notches below its top classification.

The warning follows Fitch revising its outlook on China's local currency debt from "stable" to "negative" in April this year on concerns over a massive rise in potentially destabilising debt since the end of 2008.

Fitch also warned that Chinese policymakers would face an impasse on how to respond to another global downturn, with rising consumer prices and bad debts preventing a repeat of the massive stimulus launched in 2008.