Chinese regulators have been rejigging local government debts to ease risks to banks, the China Securities Journal reported on Monday, citing a source who said over 40 percent of the troublesome local government debt falls due this year and next.

The "authoritative source" told the paper that about a third of loans granted to local government financing vehicles, or some 2.8 trillion yuan ($438 billion), will be booked as general corporate loans. Banks can then put fewer provisions for these loans, a move that is set to relieve the pressure on banks to raise fresh capital.

If true, it would mean that the problem of local government financing vehicles would have a less severe impact on Chinese banks than previously expected as long as the loans don't go sour.

Local government debt levels will peak in 2011 and 2012, with 4.6 trillion yuan ($719 billion) falling due, or 43 percent of the total estimated loans that governments have engineered to pay for infrastructure and investments.

"This source said that after several rounds of clean-ups by regulators, the risks that banks are carrying from local government financing vehicles have been much reduced," reported the paper.

China's pile of local debt has long been singled out by investors as an area of weakness due to worries that slower growth in the world's second-biggest economy could set off a wave of loan defaults and hobble its banking system.

In an attempt to quell investor jitters, China's state auditor in June laid the ground for a debt clean-up by releasing a review that said local governments had borrowed 10.7 trillion yuan by the end of 2010.

The auditor's estimate was challenged by Moody's, which said China had underestimated local government liabilities.

The China Securities Journal said regulators were taking steps to relieve pressures on banks by reclassifying about a third of total loans to local government financing vehicles (LGFVs) as loans to ordinary companies, which will mean the banks do not have to set aside as much cash to cover the risks.

Financial regulators had also encouraged amending contracts, increasing collateral demands and other steps to ease the burden on banks, said the paper.