(Reuters) -- China has instructed its banks to embark on a huge roll-over of loans to local governments, the Financial Times reported, aiming to give itself more time to deal with a debt hangover from the global financial crisis.

China encouraged banks to lend to local governments for new projects during the financial crisis to buoy the economy, but its provinces and cities now face $1.7 trillion in debts. More than half those loans were scheduled to come due over the next three years, the newspaper said.

Banks had started extending maturities for local governments to avoid a wave of defaults, the paper said, citing bankers and analysts familiar with the matter. One person briefed on the plan said in some cases the maturities would be extended by as much as four years, it said.

Not all local government loans would be rolled over, the paper said, citing a person with knowledge of the plan.

Banks would determine if there was real demand for the investment. Continued funding for the construction of highways would be approved but massive city squares might be cut off.

Banks would also consider whether investments were consistent with the government's five-year plan for industrial upgrading and cleaner growth.

(Reporting by Richard Pullin, Editing by Dean Yates)

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