THE ability of Chinese local governments to repay debts is a key risk for Chinese banks, a private report has warned.

Some 14 percent of total loans last year were extended to local government financing vehicles, Moody's Investors Service noted in its report.

Some of these vehicles have weak stand-alone credit profiles, representing a risk for Chinese banks, Moody's said.

City construction investment companies are commonly used as a proxy by local governments to raise funds, said the credit ratings and research company.

Many of have experienced cash flow stagnation or decline amid rising debt levels in recent years, according to Moody's study of 388 such companies.

About 53 percent of the surveyed companies have sufficient cash to cover estimated debt and interest payments this year without resort to refinancing, said the report.

Losses to the lenders depend on local government and regulator support for the investment companies.

Reported bad loans account for around 0.5 percent of total local government loans at the moment.

To maintain the ratio at such low level remains a challenge for Chinese banks, given slower revenue growth at some local governments and stricter restrictions on using shadow banking products, said Moody's.