The International Monetary Fund (IMF) has warned of risks brewing in China's financial system amid ballooning debt.
Stress tests covering 33 lenders in the world's second-biggest economy showed a number would fall short of the capital they ought to hold in the event of a severe downturn scenario.
The IMF said the growth in credit held by companies and households had outpaced that of the wider economy and the ratio of credit to GDP was now "very high by international standards and consistent with a high probability of financial distress".
It added that the system's increasing complexity "has sown financial stability risks".
The report follows a series of alerts over the debt pile which has ballooned in China alongside its rapid economic expansion.
Credit has grown sharply to help support GDP growth, the IMF noted.
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At times there had been pressure to keep struggling firms open rather than allowing them to fail - a policy that could conflict with financial stability, it added.
There had also been growth in increasingly complex investment vehicles while risky lending had been moving away from banks to less well-supervised parts of the financial sector.
In addition, the IMF noted the reluctance of financial institutions to allow retail investors to take losses and the expectation that the government stands behind state-owned companies and local government financing vehicles.
Such implied guarantees had helped fuel "excessive risk-taking".
The report said reining in excessive growth would require China to reduce emphasis on high GDP projections in national plans, which have spurred local authorities to set high growth targets.
It found that Chinese banks, while meeting international "Basel" targets, should gradually increase their levels of capital to provide buffers against potential losses that can be expected as credit is tightened and the assumed guarantees for investors are removed.
The IMF report said authorities at the highest level had made financial stability a top priority this year and were "taking steps to address vulnerabilities" but added that some of the underlying causes of risk were yet to be fully addressed.
China's central bank, the People's Bank of China (HKSE: 3988-OL.HK - news) , said overall a series of reports published by international bodies including the IMF were "professional and valuable assessments".
But it said it did not go along with all of the findings and that the stress tests "do not fully reflect the whole picture".