The rise in local government debt is significant, but major reforms to control leverage, monitor finances and facilitate more sustainable sources of revenue will help reduce risks, says Fitch Ratings.
Earlier, data from the Ministry of Finance showed the debt stock of Chinese local governments, including direct debt and the debt of local government financing vehicles, jumped to 24 trillion yuan (3.78 trillion U.S. dollars) from 17.9 trillion yuan in the 18 months to end-2014.
The ratings agency attributed the growth to slumping land sales, more stringent classification criteria of debt and the broader macroeconomic slowdown.
The trends that resulted in the rising debt in 2014 are likely to continue through 2015, Fitch noted, but said the load was still manageable as the government has taken various measures to overhaul financing and serve as positive steps toward greater sustainability and accountability.
The framework for an improved debt-monitoring system, which was included in legislation to enable local governments to issue debt directly, will significantly enhance transparency in local government debt management, according to Fitch.
In addition, the introduction of a debt limit -- 16 trillion yuan by end-2015, and a 3.2 trillion yuan program where higher-cost debt is swapped for lower-cost bonds -- could mitigate the risks from the rise in total debt since 2013.
Fitch expects local governments to directly save at least 100 billion yuan annually in financing costs under the current debt swap program. The swap could also bring down additional financing costs of contingent liabilities from local government financing vehicles.
While meeting with business leaders ahead of the Annual Meeting of the New Champions, also known as the Summer Davos forum, Premier Li Keqiang stressed that China's government debt risks were "controllable".
"Government debt is at a relatively low level and concerns over China's government debt risks are unnecessary," he said.
Central government debt only accounts for about 20 percent of China's GDP, while 70 percent of local government debt takes the form of investment with expected returns, the premier said.
