The non-financial sector is an area that may cause the transmission of financial risk in China. The debt held by the government sector is generally at a controllable level and there is no risk of debt defaults, but a liquidity risk does exist. Considering that the government sector has to repay 6.6 trillion yuan ($1.06 trillion) in debts this year and 5.2 trillion yuan next year, that inevitably poses a rather big challenge to the country's whole liquidity and even credit system. And the debt leverage among the non-financial corporate sector has witnessed an even faster rise than that of local governments. The debt ratio of China's non-financial sector is now much higher than the international alert level of 90 percent. According to Standard& Poor's, China's non-financial corporations had debts of $12 trillion by the end of 2013, 120 percent of the country's GDP, and the figure is expected to exceed $13.8 trillion, even higher than the $13.7 trillion debt due to be held by the US.

Overcapacity is another factor that may spark financial risk in China. With the spread of overproduction, China's real economy represented by manufacturing has become an area with concentrated bad loans, especially in its steel, photovoltaic and shipbuilding industries. The total bad loans in the country's real economy increased from438 billion yuan in the first quarter of 2012 to 592 billion yuan at the end of 2013, an increase of 35.12 percent.

The continuous shadow banking expansion based on trust companies also poses a big potential threat to China's financial system. The credit of shadow banks now accounts for about one-third of the country's newly increased credit, up from 163.5 billion yuan at the end of 2004 to 1.9 trillion yuan at the end of 2013. The scale of the country's trust assets has also witnessed a per capita growth of 30 percent over the past decade, culminating in 57.3 percent in 2008. All these loans, which are not reflected in banks' balance sheets, will unavoidably cause some short-term repercussions to the country's financial systemat a time of accelerated deleveraging if not handled prudently.

Ongoing real estate adjustments pose another channel for the outbreak of possible financial risk in China. As pessimism continues to dominate the housing market, investment in property may further decline. Given that there exists a long real estate-related industrial chain in China, a lingering housing market slump may dampen upstream and downstream industrial development and even the country's whole fixed assets investment and GDP. The close links between real estate and financial sectors also decides that drastic housing market fluctuations, especially a sharp drop of housing prices, will influence the quality of financial assets and may possibly ignite a financial crisis.

Among all these risks, how to promote deleveraging, reduce overcapacity and defuse the swollen housing bubble remain the most pressing, and must be handled with care.

The author is an associate research fellow with the China Center for International Economic Exchanges.