The Organisation for Economic Co-operation and Development also warned of China's ballooning corporate debt in its bi-annual economic outlook report released on Tuesday.
"In terms of risk, we believe that internally the biggest risk is the accumulated and fast pace of growth of credit both in terms of shadow banking and the banking system," Alvaro Santos Pereira, director of the country studies branch of the OECD's Economics Department, told reporters.
"I think it's important to intensify efforts to tackle this issue."
China's corporate debt is about 175 percent of GDP, one of the highest in emerging market economies, he said, with state-owned enterprises (SOEs) accounting for around 75 percent of that.
"One of our top recommendations is to remove implicit guarantees to SOEs and other government and public entities," said Margit Molnar, head of the China desk at the OECD's Economics Department.
Such guarantees have enabled SOEs and local government investment vehicles to continue accumulating debt, she said.
Financial risks in China are mounting because of indebted enterprises, growing non-bank activities and enormous overcapacity, the report said.
The OECD's forecast for 2017 is in line with the Chinese government's growth target of around 6.5 percent this year, versus last year's 6.5-7 percent range. The economy grew 6.7 percent in 2016, the slowest pace in 26 years.
Some analysts believe the more modest target will give policymakers more room to tackle debt risks and push through painful reforms, though authorities are expected to proceed cautiously to avoid hurting growth.
Economic growth remains high "but is gradually and appropriately moderating as the population ages and the economy rebalances from investment to consumption," the report said.
Export volumes are expected to grow 3.4 percent this year and 3.3 percent next year, up from 2.3 percent in 2016, due to increasing global demand.
Import volumes are set to grow 7.7 percent this year and 6.0 percent in 2018, down from 8.6 percent growth in 2016, as imports used to process exports fall.
The world's second-largest economy needs more innovation, entrepreneurship, effective corporate governance and reform of its state-owned sector, the OECD added.
The report did not single out the threat of rising protectionism from the United States but noted that protectionism by some trading partners would hurt Chinese exports.
However, it said China could mitigate this by signing free trade deals with other partners.
"Rising protectionism to the level that some people are talking about - or reversing some of the gains of the last ten, fifteen years - is going to be extremely costly to everyone," Pereira said.
China's rapid economic growth has been accompanied by rising inequality which could be combated by reforming the tax system and the household registration system which limits labor movement, the OECD said.
(Reporting by Sue-Lin Wong; Editing by Kim Coghill)
GLOBALES: OECD sees China growth slowing to 6.5 percent in 2017, 6.3 percent in 2018
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