* Notice issued by insurance regulator, finance ministry
* Rules part of effort to rein in local government debt
* Government also working more broadly to reduce financial risks (Updates with additional details on rules)
BEIJING, Jan 18 (Reuters) - Chinese authorities have tightened rules on how insurers can provide financing to local governments, as Beijing intensifies its crackdown on illicit local government borrowing and risky lending practices.
The new rules are the latest in a series of tough measures taken by Beijing in recent months to rein in local government debt, with policymakers increasingly wary of lurking risks in the world's second-largest economy.
In a notice dated Jan. 8, the China Insurance Regulatory Commission (CIRC) and the Ministry of Finance said that while the purchase of local government bonds is encouraged, insurers must not provide financing to local governments in ways that violate central government rules.
The authorities ordered insurance companies to check the compliance of each investment related to local government debt, and to rectify any non-compliance and report the incident to regulators.
The CIRC and Ministry of Finance "resolutely ban" local governments from illicitly starting new projects and building new debt through channels such as local government financing vehicles or government investment funds "in the name of attracting insurance companies," the guidance from the bodies said.
Thousands of local government financing vehicles, or LFGVs, have been created across China by local authorities to bypass borrowing limits and to help them hit economic growth targets.
The vehicles have taken on trillions of yuan in debt from banks, the bond market and shadow lenders, helping local governments bypass Beijing's limits on borrowing. Much of the debt comes with implicit local government guarantees.
For any debt financing related to LGFVs, insurance companies are required to provide specific legal opinions on the compliance of their investments, the regulator and the finance ministry said in the notice.
Insurance companies were required to view the vehicles as normal state-owned companies, and conduct strict risk assessment of LGFV projects based on their commercial viability instead of government creditworthiness.
LGFVs must have sufficient cash flow to repay all of their debt, and provide clear statements to insurance companies that they are not the borrowing arms of local governments.
The finance ministry and the insurance regulator also re-emphasised rules that were first made public on Friday that insurers were banned from using private equity investment schemes as a channel to skirt regulations and increase local government debts.
The authorities banned insurers from requiring local governments to provide any illicit guarantees when insurers offer funds.
REGIONAL RISK MONITORING SYSTEM
The finance ministry and insurance regulator said they would expedite a plan to create a regional credit risk assessment framework to provide risk warnings for insurance companies.
The plan echoes a decision by China's top leadership at its annual economic conference in December, in which policymakers said they would strengthen the regulation of local government debt in 2018 to reduce financial risk.
The move also follows the public outing of cities and provinces for falsifying fiscal revenues.
The finance ministry and insurance regulator told each province's government debt management team to increase cross-department coordination to monitor insurers' financing activities for local governments and LGFVs.
The debt management teams of local governments are also required to provide timely updates on local governments' fundraising activities that involve insurance companies.
The finance ministry's inspectors on the ground were told to closely monitor the matter and report any wrongdoings to the ministry and the CIRC.
Fitch Ratings estimated that 4 trillion yuan in bonds issued domestically by local government financing vehicles since the new Budget Law came into effect in 2015 remained outstanding by September. The amount was equivalent to 5.4 percent of China's gross domestic product.
China's outstanding local government debt rose 7.5 percent year-on-year to 16.47 trillion yuan at the end of 2017, according to Reuters calculations based on finance ministry data.
Law firms and accountancy will also need to bear legal responsibility if there are any fake or misleading statements or major omissions in their reports, the guidance said. (Reporting By Shu Zhang and Engen Tham; Editing by Jacqueline Wong and Neil Fullick)