BEIJING - Moody's Investors Service said Monday the outlook for China's banking system is stable over the next 12 to 18 months, and the country's banks have adequate cushions against rising non-performing loans (NPLs).

The report, entitled "China Banking System Outlook," said the outlook was based on the view that the domestic economy will remain strong and provide banks with ongoing opportunities to generate strong earnings.

"In this context, the key credit issue facing the system is the extent to which credit expansion can slow to a sustainable level that checks inflationary pressures, while simultaneously accommodating the country's 7 to 8 percent real GDP growth target for 2011 to 2015," said Yvonne Zhang, a Moody's Vice President, based in Moody's Beijing office.

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The report expected a rise in the banks' NPLs, a trend that typically follows very strong loan growth, and said even if NPLs rise to much higher levels than assumed, China's banking system would remain stable because of adequate capital, reserves for possible losses and robust earnings.

Given the system's developmental nature, there are potential risks stemming from rapid credit growth and execution risks as China tries to transform the economy from an investment-driven model to a consumption-driven one, said the report.

In the sectors of most concern to Moody's, including real estate-related sectors and loans to local government financing vehicles, rises in NPLs would be manageable, according to the report.

The report rated 16 banks in China, which together account for about 73 percent of the system's total assets.