Parts of China's banking sector should be monitored carefully and more trust product defaults are likely later this year as the economy stabilizes, a former advisor to China's central bank told CNBC.
China's shadow banking sector is viewed as one of the greatest risks to the world's second biggest economy and last month Beijing was reported to have issued stricter rules governing trust companies to counter risks to the financial system.
Read More Moody's turns negative on China property
Trust companies are non-bank lenders that raise money by selling high-yielding investments called wealth management products and then use the proceeds to fund loans to borrowers that are considered risky such as real-estate developers or local governments.
"It is a problem, especially with shadow banking, specifically the trust products sold through commercial banks," Li Daokui, an economist at Tsinghua University and a former adviser to China's central bank, said referring to concerns about non-performing loans and high local government debt.
"Overall, I wouldn't worry about non-performing loans, however certain segments of the banking sector should be carefully watched," Daokui, told CNBC on the sidelines of a UBS summit in Singapore.
Assets under management at Chinese trust firms rose to $1.8 trillion at the end of last year. Trusts overtook insurance companies in 2013 to become the largest sector of China's financial system behind commercial banks, according to a report by Reuters.