Xu said that has partially been the motivation for the "Belt and Road" initiative: "Instead of solving the overcapacity problems, they are expanding the problem to projects overseas."
"They (China) are proposing lending money to foreign governments, who will then use the Chinese funds to pay the Chinese companies," he explained.
China's debt to gross domestic product (GDP) ratio surpassed 300 percent in June, according to the Institute for International Finance. And that's before the extension of further loans.
"Expansion of these soft budget constraints at such an unprecedented rate and in such a large scale is going to generate unprecedented consequences," Xu noted.
Crucially, the countries tied to the "Belt and Road" initiative are some of the riskiest developing countries in the world. A number of research bodies are now risk assessing the political, economic and business landscapes of the involved nations.
"There is no doubt in my mind that there will be a large number of projects that will have unforeseen problems," Bjorn Conrad, vice president at the Mercator Institute for China Studies, told CNBC. "There are considerable risks of nonperforming credit in many of these projects and high risks of default."
"A risk to China's banking system is, by default, a risk to the global banking system," he continued.
However, he noted that the government would be working hard to assess risks after it was badly burned by lending to volatile countries such as Venezuela.
China's National Development and Reform Commission announced last week that it would strengthen regulation to reduce risk for domestic firms investing overseas and prevent "irrational" investment in the "Belt and Road" initiative.
"There will be an enormous amount of loans to give out, on a different scale to ever before, but also an awareness that they (the Chinese government) have to keep these at a manageable scale," Conrad said. "There will still be risks, but an understanding that they have to be managed with more scrutiny."