China's high-debt-risk regions are making progress in resolving hidden debt challenges by slowing down debt-funded investments, S&P Global Ratings said in a Monday release.

The move is a positive turning point for local government financial vehicles (LGFVs) and the overall credit profile of the local governments, the rating agency said.

While China does not publicly disclose the list of 12 designated high-risk regions, provinces that have shown progress include Inner Mongolia, which left the list, and Ningxia, Gansu, and Liaoning, which may be removed as early as this year due to successful debt-resolution efforts, S&P said.

However, the progress may come at the cost of growth, as restricting capital could weaken the governments' capacity to improve their industrial bases, according to the rating agency.

Meanwhile, S&P also sees a convergence in debt burdens, as economically stronger regions are taking on more debt to fund investments.

Despite the ongoing efforts to curb debt growth, the capacity of local governments in high-risk regions will likely remain burdened by LGFV and state-owned enterprise debt, given their limited cash coverage, S&P said.