(Yicai Global) June 14 -- Chinese authorities successfully kept local government debts in check last month thanks to policies aimed at curbing financial risks. 

Outstanding local debts remained steady compared to April at CNY16.6 trillion (USD2.6 trillion) with CNY10.5 trillion in general liabilities and CNY6.1 trillion of special project arrears, China's finance ministry said in a statement, adding that both figures are within the government's targets.

The central government sets rigid upper limits on China's local authorities, capping the indebtedness at CNY21 trillion this year, including CNY12.4 trillion general debts and CNY8.6 trillion worth of special project debts. New borrowing by local governments is limited to CNY2.18 trillion. 

Local governments and their financial affiliates (such as banks, investment companies and trusts) are active participants in and advocates for financial reforms and have contributed positively to the development of the national financial market through financial innovations, the ministry said. They also gravely require medium to long-term funding, which may lead to disorder in the sprawling financial sector. In addition, financial innovations may also create new debt-related risks. 

The issue has remained a major concern for the central government. The National Development and Reform Commission and the Ministry of Finance issued a notice in May calling for efforts to revamp market discipline tools and prevent risks associated with foreign and local government arrears. Enterprises looking to take out long-term loans are required to 'de-virtualize' their business operations and carry out market-based financing according to regulations. Companies are prohibited from requesting or accepting guarantees or bailouts from local governments.

The average duration and issue yield of local government bonds issued during the first five months of this year were 5.8 years and 3.97 percent respectively, data from the ministry shows, and some CNY17.1 billion worth of local government bonds were sold in this period.

Editor: William Clegg