Chinese banks could face funding disruptions, which in turn will weaken their capability to lend, as deposits are shifting to off-balance sheet wealth management products that offer higher returns, said Fitch Ratings on Tuesday.

New credit on the Chinese mainland this year could fall for the first time since 2008, due to weaker macro demand and tighter liquidity among banks, said Charlene Chu, head of China financial institutions at Fitch.

Chu estimated that total private financing this year may fall to 16.5 trillion ($2.6 trillion) to 17 trillion yuan, from 17.5 trillion yuan last year.

Chu said at a forum on Tuesday that "non-banks" such as trust companies and offshore channels are attracting mainland bank deposits.

She said large companies in China are taking deposits out and extending the money to small, cash-strapped suppliers in the form of entrusted loans.

Meanwhile, Chu said, retail and institutional investors are shifting capital from banks to higher-yielding investments offered by trust companies.

Chinese companies also borrow abroad and keep the money offshore, but they must liquidate an onshore deposit to repay these obligations as they fall due, she added.

Cash inflows from banks' deposits on the mainland are coming down, as excess deposits have fallen and corporate deposit growth has plunged, according to the People's Bank of China.

She mentioned that although total wealth management products account for only 12 percent of the country's deposits, half of the new deposits are coming through this channel.

Aside from the lending capacity problem, the rating agency is also concerned that interest rate liberalization could increase volatility in the banking sector.

"If you look back over the past decade, the main source of stability in the Chinese banking sector was the very stable policy environment that was very strict in terms of government-set interest rates and a closed capital account, which led to very stable capital funding," she said.

Chu added that the problem is that the banks have funding challenges and need more money from offshore.

The rating agency is concerned that China is now carrying out both capital account opening and interest rate liberalization, representing much change in a short time.

China cut its benchmark loan and deposit interest rates by 25 basis points last week and said it would allow deposit rates to float higher and loan rates to float lower than under previous regulations. This was seen as an important step toward interest rate liberalization.

Fitch maintains an "AA-" rating and a "negative" outlook for the Chinese currency, mainly due to the country's debt and other issues.

sophiehe@chinadailyhk.com