China's local government financing vehicles with high debt risk are inching toward resolution through the country's fiscal reform measures, according to a note by S&P Global Ratings released Monday.

However, while the reforms are restrictive for capital and could interfere with local governments' ability to boost their industrial bases, they could "turn out to be credit positive and economically negative for certain regions," the rating agency quoted credit analyst Yunbang Xu.

Local governments will be able to help solve hidden debt by reducing the use of debt-funded investments through local government-backed entities, credit analyst Christopher Yip added.

"We view industrial investment as key to meaningfully expand a local government's tax base and fiscal capacity," according to a note by S&P Global Ratings.

Chinese provinces will see divergent investment growth due to uneven potential and emphasis on industrial upgrades, Xu said.