China has seen rapid credit expansion as a result of Beijing's stimulus in 2008-09 to counter the global crisis, with the stock of bank loans to the private sector hitting 135.7 percent of gross domestic product at end-2012, the third-highest of any Fitch-rated emerging market, the ratings agency said.
Total credit in the economy including various forms of "shadow banking" activity may have hit 198 percent of GDP at end-2012, up from 125 percent at end-2008, it added.
Fitch said that the percentage of funding coming from bank loans is declining. It estimated that only 55 percent of China's new social financing - which includes bank credit as well as corporate bonds and trust loans - came from bank loans in the 12 months ended February 2013, down from 76 percent in 2009.
"The proliferation of other forms of credit beyond bank lending is a source of growing risk from a financial stability perspective," Fitch said.
Chinese regulators have shown greater concerns over potential risks from off balance-sheet banking activity.
China's banking watchdog has ordered banks to strengthen checks on the underlying assets of a range of wealth management products to ward off potential risks to the financial system.
"Definitely the systemic financial risk in China has been increasing steadily in the past two years," said Wei Yao, China economist at Societe Generale in Hong Kong.
"This shadow banking issue could be the trigger for a hard landing or make the situation worse if Chinese growth starts to decelerate; it's one of the weakest links in the economy," she said.
Yao said signs of local government involvement in shadow banking could only fuel financial risks.
"China's public indebtedness is therefore not a weakness, but neither is it a strength relative to rated peers, underscoring the case for equalising the foreign currency and local currency ratings," the statement said.
But the ratings agency affirmed the country's long-term foreign currency ratings at A-plus, backed by the strength of China's foreign exchange reserves, the world's largest. At the end of 2012, the reserves were $3.31 trillion.
There is growing evidence that the world's second-largest economy is moving towards a more sustainable consumption-led growth path, Fitch added.