Senior official Zheng Xiaoyu was executed for corruption in July
REPORT: Corruption threatens China's future
A report by the Carnegie Endowment for International Peace says it costs the Chinese economy $86bn (£42bn) a year.
The report says bribery and theft by officials are rising and cost China more than its annual education budget.
And it says the problems will continue because the ruling Communist Party, due to begin its five-yearly congress next week, is unlikely to reform the system.
The Washington-based think-tank concedes that party bosses have taken many measures to tackle the problem.
But the report says the leaders have not gone far enough because they fear losing their grip on power.
"Corruption has not yet derailed China's economic rise, sparked a social revolution or deterred Western investors," the report states.
"But it would be foolish to conclude that the Chinese system has an infinite capacity to absorb the mounting costs of corruption."
The report's author, Minxin Pei, estimated that 10% of the government's procurement budget and administrative spending was used as illicit payments or bribes or was simply stolen.
This amounted to 0.65% of gross domestic product (GDP).
"Even after adjusting for inflation, the sums of money looted by government officials today are astonishing," the report claims.
Mr Pei said the vast scale of corruption was possible because of extensive state involvement in the economy, and the party's reluctance to adopt necessary reforms.
Citing the city of Fuyang, the report states: "In the worst instance, collusion has transformed entire jurisdictions into local mafia states."
Communist Party leaders have repeatedly warned that corruption threatens social stability.
Earlier this year, the party's watchdog announced that almost 1,800 officials had confessed to corruption in June alone.
Zheng Xiaoyu, a former food official, was executed for corruption in July.