Growing levels of debt represent "big risks" to China's economy, according to the International Monetary Fund (IMF).
In its first report since 2011 on China's resistance to shocks and contagion, the IMF said it was still concerned about imbalances in the world's second largest economy.
A stress test in Chinese banks found that four fifths were vulnerable.
Beijing should put less emphasis on growth, strengthen regulation and improve bank finances, the IMF said.
The "big four" Chinese banks had enough capital, but "the big, medium and commercial banks of the city seem vulnerable," the IMF said.
Stress tests covered the banks with 171bn yuan ($ 26bn, £ 19bn) in total assets, and 27 of the 33 evaluated needed to raise more funds, even though they already complied with the Basel III regulations on bank capitalization.
The IMF warned in October that China's dependence on debt was growing at a "dangerous pace".
China has experienced strong growth in recent years, driven by investment and exports financed with debt. But in order to maintain high growth rates and protect employment and social stability, local governments extended credit and protected bankrupt companies, according to the report.
China's debt has soared and now amounts to 234% of the country's total output, according to the IMF.
"The apparent primary objectives of avoiding large declines in local jobs and achieving regional growth objectives have come into conflict with other objective policies such as financial stability," the report said.
The IMF acknowledged that the authorities were already taking measures to contain the risks. But the Fund said that China should further adjust its economic strategy.
"We recommend that the authorities reduce GDP growth," said Ratna Sahay, deputy director of the IMF's Monetary and Capital Markets Department.
"The implicit guarantees to state-owned companies [state-owned enterprises] should be eliminated carefully and gradually," she said.
The IMF also warned against the rapid development of new financial products, which it said could "quickly become large and popular and potentially a systemic risk."
The Fund says that better coordination among supervisors was essential to contain the "serious" risks posed by innovative products.