China defends 2 banks downgraded by Fitch

Regulator insisted banks are sound despite admitting that country’s excessive lending exposed them to credit risk.

A senior Chinese central bank official took issue on Monday with Fitch Rating Inc.'s recent credit-rating downgrades of China Merchants Bank Corp. and China Citic Bank Corp., and said the operations of all Chinese banks are sound, despite the global financial crisis.

It isn't unusual for China to fight back on such a research note. In May 2006, Ernst & Young LLP received a sharp rebuke from Beijing for the auditing firm's estimate of the size of bad loans in China. Four days after China lashed out against the report, Ernst & Young retracted its opinion and made an apology.

But in a departure from that time, Xuan Changneng, head of the Financial Stability Bureau of the People's Bank of China, acknowledged that China's lending spree last year exposed domestic banks to huge credit risk and pressure to increase capital and profit.

The remarks by Mr. Xuan are the first high-level response to Fitch's downgrades of the two banks' credit ratings earlier this month. The downgrades have had little effect on capital markets in China, but they highlighted growing concerns about the long-term health of the country's banking system following extraordinary credit growth in 2009.

View the full story in the Wall Street Journal.