BEIJING will have to jam on the economic brakes to save Chinese cities from bankrupting themselves, a top Chinese adviser says.

He Fan, an assistant director at the Chinese Academy of Social Sciences who frequently advises China's top leaders, says as much as two-thirds of China's 4 trillion yuan stimulus program will be spent by local governments and financed mainly by state-owned banks.

Some local governments will virtually go bankrupt, Professor He told the Herald.

Previously local governments generated all their money from land sales. But this is not sustainable. Some areas have already sold quotas for the next 30 years.

Several large cities are thought to be at risk, including Kunming and Hangzhou. Their problems are exacerbated by a slump in real estate sales.

The flood of new loans to local government projects has reignited the Chinese economy and raised hopes that Australia can be insulated from the worst of the unfolding shock to international demand.

But the recovery was narrowly based and could come to an end next year when construction lending was tightened, Professor He said. The alarm factor, he said, was that the economy would lose its momentum next year because it could still rely on investment to sustain growth.

There had to be private investment, but there was no signal for where private investors could put their money, he said, noting private investors could not compete in services like health and education until those sectors were liberalised.

Professor He and others are concerned that the rivers of easy money have overflowed into asset markets, such as stocks and commodities, as well as dud projects that were previously rejected by the National Development and Reform Commission.

Stephen Green, an economist at Standard & Chartered, said local governments would have to raise taxes or sell more land to repay their bank loans when the easy money stopped.

"The Government is betting that today's spending will spur economic growth, which will, in turn, generate tax revenues to pay the bill," Dr Green said. "Either the local governments will pick up the tab, or the banks will."

The central government takes the lion's share of tax revenue but has pledged to spend only Yuan1.2 trillion of the projected Yuan4 trillion stimulus package from its own budget in 2009-10, including just Yuan70 billion in the current quarter.

Chinese banks lent Yuan5.2 trillion in the first four months of this year, more than the target for the full year.

Professor He said new loans this year would have to be capped at about Yuan6 trillion in order to avoid bankrupting local governments or forcing a new round of massive bank recapitalisations.