The World Bank has called for proper management of China's hefty local government debt.
Experts believe the figure stands at more than 1 trillion yuan (US$125 billion), or 10 per cent of China's gross domestic product.
Since there is no law to regulate local governments' borrowing, the organization has suggested drafting relevant regulations to tackle the problem.
"It's a sensible policy choice, as is establishing a new legal framework for local borrowing, though this is a complex task," the World Bank said in a quarterly report on China's economy yesterday.
Local governments are responsible for about 70 per cent of total government expenditure, including health, education and social security.
"The debt has been formed mainly because of mismatches for years between expenditure assignments and revenues of local governments," said Bert Hofman, a lead economist for the World Bank.
Policy insiders said the central government has no plans to write-off the debt, which is believed to be more than 1 trillion yuan.
"As far as I know, the Ministry of Finance has been firmly opposed to writing off the debt but it has agreed to render more financial support to grass roots government," said Jiang Zhongyi, a senior researcher at the Ministry of Agriculture.
Jiang said new debt has been formed in some local governments as the central or provincial governments did not transfer enough cash to support local social undertakings.
He said complaints have been "mounting" in some counties, as civil servants were being unpaid or under-paid since the government scrapped agricultural taxes nationwide.
The World Bank said a range of reform was necessary to manage current debts and risks, and prevent new ones forming.
A research team with the National Development and Reform Commission also warned of the financial risks brought by heavy borrowing.
The team suggested more financial support from the central government to meet the local governments' needs in education, medical care and social security.