China has added two names to the list of a trial program which allows local governments to issue bonds directly, expanding the program to six regions in the country, said the Economic Information Daily. 

Shandong and Jiangsu, two neighbor provinces in east China have been given the green light from the State Council to join four local governments which got approval for bonds issues in 2011, the paper published by the official Xinhua news agency said Friday.
 
Back then, the four local governments including Shanghai, Zhejiang and Guangdong Province, as well as Shenzhen, one of its municipal cities were only allowed to issue 3-year and 5-year bonds before the Chinese government expanded the maturity period to 7 years in 2012.

Allowing local governments to issue bonds provides them an alternative source of finance despite tightly-controlled quotas that allow the governments to fund themselves, analysts said.

The bond issues by each of the local governments could not exceed quota limits set by the State Council, or 50% of the bond issues allowed for its region.

China used to prohibit its local governments from issuing bonds before the Ministry of Finance began to issue bonds on their behalf since 2009 with an annual quota of 200 billion yuan.

Frustrations over tight centralized controls also led to a surge of local government financing vehicles (LGFVs) which local governments used to raise funding, a major risk to the country’s financial system.

A report released by the national audit office last month showed that debt holdings of 36 local governments totaled 3.85 trillion yuan ($624.6 billion) as of the end of last year, up 12.9% from the end of 2010, raising questions over their ability to repay debts. 

China needs a set of well-planned and transparent rules about bond issuance to replace irregular LGFVs and rein in ballooning local government debt, the paper quoted an anonymous source as saying.