China vowed on Tuesday to confine local governments financing mainly to issuing bonds.
Under a sweeping plan by the National Development and Reform Commission, approved by the State Council, local governments will be weaned off borrowing through financing vehicles in 2014.
Financing vehicles are usually companies that help local governments to borrow so that they can bypass laws that generally ban governments from directly soliciting credit. As a solution, China will set up a system of direct bond sales.
Local governments will be given credit ratings and the amount they borrow will be capped with quotas. Authorities will monitor risk and handle emergencies.
Many local governments are reliant on financing vehicles as they are often in need of money to fund projects.
Default risks have built up during the expansion of local government debt due to poor management and a lack of supervision.