In a report Thursday, rating agency Standard and Poor's highlighted the "tough choice between supporting growth and controlling debt sustainability" as China tries to find new ways to fund public investments.
"Although aggregate and provincial GDP growth stabilized in the first two quarters of 2016, we believe the fiscal conditions of Chinese local governments are under more pressure given the weakened economy," S&P analysts wrote in a report.
The rising debt pile of local government financing vehicles (LGFV) raised questions on credit risks, said S&P.
"As long as investments remain a growth impetus, it is very hard to shift away from the old public financing model to weaken the LGFVs' role in public investment," said S&P credit analyst, Xin Liu.
"The growing pile of LGFV debt will add to the fiscal vulnerability of local governments, which already rely on these financing vehicles to execute public investment mandates," she added.
S&P's warning on local government debt comes amid concerns about overall debt levels in the country as the world's second-largest economy begins to slow after years of boisterous growth.