"'Open the front door, block the back door,' and expand the scope of local government independent bond issuance," the Development Research Center said in its draft proposal submitted recently to leaders of the ruling Communist Party and published last week on the website of Beijing's Renmin University.
Chinese law bans local governments from selling debt directly in a measure that was meant to restrain their borrowings, but local officials have skirted it by raising debt through financing vehicles to fund infrastructure projects.
Borrowing through so-called local government financing vehicles (LGFV) exploded in 2008-09, when China pumped 4 trillion yuan ($656 billion) in stimulus spending through the economy to cushion the impact of the global financial crisis.
"The rise in local government debt is ... a concern, given the complexity and opacity of municipal finances," the World Bank warned in a regional economic update this month.
"This lack of transparency has led to debt levels higher than would otherwise be acceptable to lenders, investors and policy makers."
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Many reform advocates hope new policies announced during the party's Third Plenum in November will include aggressive expansion of a pilot municipal bond program launched in 2011.
They argue that local governments' current reliance on bank debt and loans from trust companies - another form of opaque lending - contributes to profligate local spending. The use of LGFVs adds to the opacity.
Economists say a real municipal bond market would be key to addressing the local debt issue, with disclosure requirements helping to impose a hard budget discipline on local officials.
In another sign authorities are poised to expand municipal bond issuance, another influential think tank, the China Academy of Social Sciences, teamed up with a major credit ratings agency last month to issue ratings of local governments.
Lower costs, better fit
The local bond pilot remains tiny compared to the scale of local financing needs. The finance ministry in March set a quota of 350 billion yuan ($57 billion) under the program for 2013.
Still, bonds have been well received by investors and yields have hovered around 3.8 percent to 4.5 percent, nearly as low as Chinese treasury bonds of the same maturity.
By contrast, weaker localities forced to resort to trust-company loans and other sources of shadow-banking finance often pay more than 10 percent annual rates.
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That suggests expanded bond issuance could enable many localities to cut borrowing costs.
The use of longer-term municipal bonds could also relieve the worrying mismatch between infrastructure investments that may take decades to produce financial returns and the short-term loans that are often used to finance such projects.