French bank BNP Paribas SA said on Thursday that China's local government debt is not a "fatal problem", as Beijing is expected to publish the latest round of audits next month.

In the worst-case scenario, Chinese banks would suffer 1.87 trillion yuan ($306 billion) in losses, said Chi Lo, a senior strategist with BNP Paribas in Hong Kong. That would lower the banks' tier-1 capital adequacy ratios by 3.1 percentage points on average, but the ratios would still be at a high of 7.5 percent, 0.5 percentage point higher than the 7 percent level required by Basel III, which has yet to be implemented.

"Chinese banks are in a financial position so strong that even a systemic shock won't cause system breakdown," said Lo.