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The International Monetary Fund warned that the increasing levels of debt present big risks to the Chinese economy.
In the organization's first report since 2011 on China's resistance to shocks and contagion, IMF said that it had lingering worries over imbalances in its economy.
A stress test on China's lenders also revealed four-fifths were vulnerable to risks. The stress test included banks holding 171 trillion yuan in total assets, and 27 out of the 33 tested needed to secure more funds, despite already fulfilling the requirements set by the Basel III regulations on bank capitalization.
According to IMF, the country's “big four” banks had sufficient capital but large, medium and city-bank commercial banks were vulnerable.
China has seen solid growth over recent years, fueled by debt-funded investment and exports. However, in order to keep up with the elevated growth rates and to safeguard jobs and social stability, local government had extended borrowing and protected failing firms, according to the report.
China's debt has swelled and is now equal to 234 percent of the nation's total output, IMF said. The report stated the clear primary goals of preventing large declines in local jobs and hitting growth targets have compromised other policy goals such as financial stability.
While the IMF acknowledged the country's efforts to curb the risks, it advised to China revise its economic strategy further.
