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China's recent reforms to its currency had done little to prompt reform in many of the domestic banks, which remain unprepared for foreign exchange rate fluctuations, domestic press reported.

"Domestic banks have never operated under a flexible exchange rate system and they lack the relevant operational skills and risk management capabilities," the China Banking Regulatory Commission (CBRC) said in its report carried in the Shanghai Securities News.

"All of their management systems, technologies, personnel and administration regarding foreign exchange have yet to be fully tested by a flexible exchange rate," the CBRC said.

Many bankers and banking executives in China have little understanding of foreign exchange, and that this could expose them to greater foreign exchange risk under a flexible exchange rate, it said.

"Some banks said that yuan appreciation would be favorable for them even though they have long positions in the foreign exchange market," it said.

"The necessity and urgency for proper foreign exchange management is still largely being neglected," it warned.

China revalued the yuan by 2.1 percent at the end of July and effectively placed it in a currency basket, a move that essentially lays the groundwork for a more flexible exchange rate regime at some point in the future.

However, despite pressure from trading partners, the Central Government has steadfastly resisted calls to allow the yuan to appreciate further, saying the banking system is still to rickety with bad loans and also needs more time to adjust to a new system — a tightly managed float.

The lack of proper risk management tools and procedures, as well as internal governance standards, is another weak point of local banks, the regulator said.

A more flexible exchange rate could lead to a fall in the value of the foreign-denominated assets of banks and the threat posed by exchange rate fluctuations could also make it more difficult for the banks to collect loans, it added.