The average bank lending rate rose by 29 bps in the second half of 2013, although average underground lending rates were stable.

"If there is a delayed pass-through effect, business borrowers will face higher funding costs in the coming months. That will hit business sentiment and drag on economic growth," Zhu said.

With credit tight, domestic companies are now paying more than 10 percent interest rates on bank loans. Private loans are even more costly, with interest rates higher than 20 percent.

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It's a lot cheaper to borrow overseas. For example, State-owned China Oil and Food Import and Export Corp has issued five-year, US dollar bonds with a coupon of 3 percent. Baosteel Co Ltd issued five-year dollar bonds as well, with a coupon of 3.75 percent.

According to capital markets data provider Dealogic (Holdings) Plc, the amount raised by Chinese companies in Hong Kong and the United States rebounded to its previous record level in 2013 after a two-year drop.

That suggests a slow recovery in investor confidence after the global financial crisis.

In 2013, Chinese companies issued $49.7 billion in general purpose bonds overseas, compared with $29.7 billion in 2012 and $25.9 billion in 2011.

Dealogic said that as of mid-February this year, Chinese real estate companies had issued $7.9 billion in dollar-denominated bonds, accounting for 38 percent of the world's total real estate debt.

Some analysts have forecast that Chinese companies may start to issue more dollar-denominated bonds after releasing their first-quarter results to lock in low interest rates.

Interest rates are expected to rise as the US Federal Reserve Board tapers its quantitative easing policy.

"While there is a risk of a messy unwinding as the Fed's funds target rate rises, we do not believe that China's leverage problem is external, but it is a domestic chal-lenge," said Green.

"Even if US dollar exchange rates rise in 2016 and 2017, assuming healthy domestic growth, there should be no need for the outstanding debt to be unwound," he said.

Green added: "There is a widespread view that the default risk of China's large financial institutions is extremely low."

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