China's banks face rising financial risks: economist

China's banks are faced with increasing risks born out of shadow banking, local government debt, bad loans in industries with overcapacity, and looming house price declines, an economist warned on Thursday.

The alarm bell was sounded by Xiang Songzuo, chief economist at the Agricultural Bank of China, when speaking to Shanghai Securities News which is owned by Xinhua.

Xiang expects 2014 to be a year of risk on a large scale, led by default risks. About 40 percent of shadow banking business and 30 percent of local government debts fall due this year.

The danger stems from non-performing loans in sectors with overcapacity and the possibility of a fall in housing prices.

Overcapacity is more serious in some sectors than others. Where the rate of capital flow has decreased and accounts receivable and payable increased, the demand for short-term loans or working capital will rise, he said.

"All these problems will be manifested in more bad loans, and that's why the banks will have an increasingly difficult time," Xiang said.

For the property market, Xiang sees a high possibility of price declines resulting from excessive supply, but did not foresee a collapse in the whole housing market.