THE key risk facing Chinese banks is the ability of local governments in the country to repay their debts since 14 percent of total loans last year were extended to the local government financing vehicles, a Moody's Investors Service report said yesterday.

The outstanding debts at 36 local governments totaled 3.85 trillion yuan (US$624 billion) by the end of last year, of which 78 percent were bank loans, according to data.

"Exposure to these vehicles represents a key risk for Chinese banks, reflecting the vehicles' weak stand-alone credit profiles," Moody's said.

Although bad loans stood around or below 0.5 percent of total lending to the local governments, maintaining that ratio is a challenge for the Chinese banks given slower revenue growth at some local governments.