Century Weekly magazine said this week that 23 percent of the 7.66 trillion yuan (US$1.1 trillion) extended to local governments' financing vehicles were in danger of turning sour.

It cited estimates by the China Banking Regulatory Commission.

However, the agency downplayed the risks to the banking system in a statement sent to AFP.

“Currently Chinese banks have enough provisions and good capability to withstand risks,” it said.

The statement acknowledged some of the loans “do not comply with regulations” but added that with appropriate measures “their risks can be controlled and resolved.”

Regulators will carry out spot checks at commercial banks in the third quarter to ensure banks can cope with potential non-performing loans, according to the statement.

Chinese banks lent huge amounts to provincial financing vehicles for construction projects last year after Beijing called for nationwide efforts to spur the economy.

China has powered out of the global crisis on the back of a stimulus package worth four trillion yuan and the state-backed bank lending, which saw new loans nearly double from the previous year to 9.6 trillion yuan in 2009.

The lending spree raised concerns in Beijing over a possible new crop of bad loans that could threaten the world's third-largest economy.

The roughly 1.76 trillion yuan reportedly at risk of default would be nearly four times the amount of all non-performing loans in Chinese banks as of the end of June, according to figures released by the bank regulator.