One of the top international rating agencies says it may downgrade China’s credit-worthiness within two years because of the increased risk of heavily indebted banks and local governments.

Analysts from Fitch Ratings said at a meeting in Taiwan Thursday that rising defaults and high inflation, combined with large numbers of loans, mean China’s credit risk has increased.

Earlier this year Fitch changed its outlook for China’s debts in local currencies from “stable” to “negative.” Its analysts said Thursday that an official downgrade could come within 12-24 months.

The head of the rating company’s Asian-Pacific ratings committee, Andrew Colquhoun, told the Reuters news agency that Fitch expects to see “a material deterioration in bank asset quality.” Another analyst, Charlene Chu, said “China’s state-directed banking system is under increasing strain.”

The analysts noted that China’s local governments and state-controlled banks made large loans to help finance the country’s growth in recent years, and they are concerned that a significant number of those loans may not be paid back. They said a lack of disclosure by financial institutions are compounding the problem.