China has expanded a pilot program allowing local governments to sell bonds directly and play a bigger role in managing their own finances, the Ministry of Finance (MOF) said Thursday. ­Experts said the move will make local government borrowing more transparent.

Two coastal provinces, East China's Shandong and Jiangsu, have been added to the program, which started with Guangdong, Zhejiang and the cities of Shenzhen and Shanghai in 2011, the ministry said in a statement on its website.

Before the trial program began, no local governments were allowed to issue bonds directly. Instead, the MOF issued the bonds on their behalf.

Due to this constraint, local governments raised funds by setting up local government financing vehicles (LGFVs). These financing arms borrowed money from commercial banks and enjoyed low financing costs because they were backed by the local governments' credit and fiscal revenues.

Local government debts soared after China's 4 trillion yuan ($652.8 billion) stimulus package in 2009-10, and the central government has tightened control of the LGFVs to curb the risk of bad debts.

The National Audit Office said in early June that an audit of 36 local governments found they had debts totaling 3.85 trillion yuan at the end of last year, up 12.94 percent from the end of 2010.

However, as local governments are still eager to raise capital for local infrastructure construction, they have borrowed heavily through shadow banking activities, which involve money raised from wealth management products (WMPs).

This has been difficult for the financial regulator to supervise as WMPs are off-balance sheet bank products. Such borrowing could lead to systemic financial risks if not properly managed.

Global Times