China needs to allow local governments to issue bonds to help tackle the financing bottleneck in infrastructure construction, said a senior official of the country's top economic planning agency on Friday.

The government should further relax the existing regulatory system and allow county and prefecture-level cities to issue bonds, said Xu Lin, head of the Fiscal and Financial Department of the National Development and Reform Commission.

The NDRC has accelerated project approval in a bid to boost economic growth. China’s economic growth slowed to 7.6 percent in the third quarter, the slowest pace in three years.

On Wednesday it announced the approval of 25 rail transit projects with a total estimated investment of 800 billion yuan ($127 billion).

However, many cities are lagging behind in terms of water, sewage and waste treatment facilities, said Xu.

It’s “not sustainable” for local governments to rely on income from land transfer payments to finance infrastructure construction, he added.

Many cities in eastern coastal areas have seen a sharp decline in income due to the stringent measures on the real estate market.

Bank credits, a vital source of capital for local government infrastructure construction, often add to their financial risks, as the debt maturity of bank loans usually doesn’t match the profit period of the projects.

To solve the financing difficulties, the government needs to further relax its regulations and allow local governments to issue debt, Xu said.

According to existing budget law, local governments are not allowed to issue bonds without the approval of the State Council.

The Ministry of Finance has set a quota of 250 billion yuan for this year’s local government bond issuance, which is totally inadequate, according to Xu.

China has sufficient funds for infrastructure projects, as a large portion of bank deposits have yet to be invested in the real economy.

Corporate bonds only account for about 10 per cent of China’s GDP, he said.

Three regulators manage bond issuance: The NDRC controls corporate bonds issued by State-owned companies; the China Securities Regulatory Commission is in charge of bonds issued by listed companies; and the central bank looks after commercial paper and medium-term notes traded in the interbank market.

China’s local government debts hit 10.7 trillion yuan at the end of 2010, equivalent to about 27 percent of gross domestic product, according to a report from the National Audit Office. Although some local governments are facing higher risks in repaying their debts, the nation’s overall risk is relatively low, said Xu.

Contact the writers at [email protected] and [email protected].