Among the other domestic risks, the fund said that Beijing needs to keep the local government debt in check, which has been a cause of concern for many analysts.

BBC: IMF: Worsening eurozone crisis a 'key risk' to China

The National Audit Office (NAO) estimated that the ratio of local government debt to aggregate income was 84 percent, a level that appears to be manageable, Barclays analysts say.

FORBES: Barclays' Take On China's Muni Debt 'Crisis'

But some economists worry that such high rates will worsen the recession, and make it hard for the government to service local-currency debt.

ECONOMIST: Brazilian jitters

Asked about the government's spending plans in Edinburgh, Mr Brown told local business leaders on Friday the government had cut national debt as a proportion of national income over the past decade.

BBC: Osborne blasts Brown's borrowing

With the fiscal measures approved, the government will be able to renew its local-currency debt.

ECONOMIST: Brazil: The real thing | The

At the same time, national and local government debt now approaches 200 percent of GDP.

FORBES: 2011, Year of Decision

In Albacete, to the north, the power company cut the supply to municipal-owned buildings last week, fed up that the local government was simply ignoring its million-euro debt.

BBC: Residents of a bankrupt Spanish town feel cuts pain

And the National Audit Office estimates that 23% of local government debt, which it put at 10.7 trillion yuan in June, depends on land sales for repayment.

WSJ: Chinese Village, Police in Standoff Over Villager's Death

The government is issuing more debt, particularly in local currency.

ECONOMIST: Venezuela on a gusher | The

Even Germany - with its debt-laden local government - cannot guarantee the debts of the rest of Europe.

BBC: Eurozone crisis: What Germany can learn from Italy

Despite the strict prohibition, their debt has skyrocketed as local officials incurred obligations through LGFVs, local government finance vehicles.

FORBES: How Can China Save Europe When It's Defaulting On Its Own Debt?

As a result of the tax preference for munis, the federal government not only forgoes the revenue that it would otherwise be collecting from the interest income, but more importantly, it effectively subsidizes greater spending and debt by state and local government agencies.

FORBES: For the Sake of Tax Reform, The Muni Bond Exemption (and State Tax Deduction) Must Go

Investors are also concerned about the financial problems of Chinese solar companies, which have accumulated heavy debt obligations over the past several years to fund capacity expansion, with the support of local banks and government.

FORBES: Chinese Solar Fortunes Shrivel, Leaving Just One Billionaire