China's banking regulator tried to ease concern over risks from bank lending to local government financing vehicles, saying such loans won't necessarily go bad.

The China Banking Regulatory Commission said in a statement that risks can be contained through measures to secure repayment. Such loans are typically backed by collateral and guarantees, it said today. Separately, Finance Minister Xie Xuren said local governments should improve their financial management.

Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) lent to finance local infrastructure projects, according to a person with knowledge of data collected by the CBRC. The estimate implies about $260 billion of debt may go sour, almost five times the amount the nation's five largest banks are raising to replenish capital.

"We should assume the real problem is worse than the initial evaluation," said Michael Pettis, a finance professor at Peking University in Beijing and former head of emerging markets at Bear Stearns & Cos. in e-mailed comments today. "And there is likely to be more to come."

Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn't being used for viable projects.