(Beijing) — China's growth may slow to about 6.5% in 2017, an annual report by the country's top government think tank forecast, dismissing concerns about a hard landing but warning of a potential "regional financial crisis" as debts pile up.

The world's second-largest economy is widely expected to grow by 6.7% this year.

Expansion is predicted to slip to around 6.5% due to sustained weakness in foreign demand, the declining ability of investment to drive growth, and a slowing in consumption increase, the Chinese Academy of Social Sciences (CASS) said in its 2017 Economy Blue Book, which was released Monday.

However, "employment and prices will be maintained at a generally stable level and the Chinese economy will not have a hard landing," the report said.

But the CASS voiced concerns about the mounting debt level in the country, noting that 7.6 trillion yuan ($1.1 trillion), or nearly half of total social financing, was used to pay off interest in 2015, calling the level of leverage in the country "Ponzi financing."

"The more speculative financing and Ponzi financing in the economy, the higher the leverage is, and the more likely a debt crisis will be triggered," it said.

The situation was not improved much despite numerous government tightening measures in 2016 — corporate profits tumbled while debt defaults increased as "Ponzi financing" continued to expand, it added.

Over the next one to three years, "expectations on systemic risks in the economy will continue to accumulate and it is possible a regional financial crisis could break out, which will be extremely negative for China's economic development and social stability," it said.

Emerging economies like China are facing strained borrowing conditions abroad, rising debt levels and weakening demand for their products next year as global economic prospects remain gloomy. Expectations of more U.S. interest rate hikes have led foreign capital to leave emerging markets, worsening asset valuations and volatilities there, it said.

The refugee crisis has made the European Union's debt problem more complicated and cast a pall over the region's recovery, it said.

In addition to waning foreign demand, Chinese exporters' market share is also being eclipsed by their counterparts in countries such as Vietnam and India. Rising labor costs and the strengthening of the yuan against some currencies have impaired the international competitiveness of China-made products, it said.

Within the country, both private investment growth and foreign investment slumped, underlining investor pessimism on the outlook for the Chinese economy, according to the report.

Increases in private investment, which account for 60% of the country's total investment, have been slumping since January as revenues and profits of manufacturing, service and mining, in which private stakes are high, continued to decrease. Meanwhile, foreign investment has fallen by around 20%, it said.

Private investment and foreign investment "are profit-seeking, market-based activities and can better reflect the confidence and expectations of social capital on China's future economic development," the report said.

Another factor dragging on economic expansion in the medium to long run is spiking home prices and the huge value of outstanding mortgage debt. These will force households to cut spending on consumer goods and deplete the financing pool for other industries such as manufacturing and service companies, it said.

Contact reporter Fran Wang (fangwang@caixin.com)