File photo shows a real estate project in Hangzhou, capital of east China's Zhejiang Province. File photo:Xinhua

China will firmly curb the increase of new "hidden debt" and stabilize the mechanism that settles existing "hidden debt" to guard against systemic financial risks, while speeding up preliminary work for special-purpose bond issues next year, Chinese authorities said on Thursday, after the tone-setting Central Economic Work Conference last week put a heavy emphasis on economic stability.

The comments sent a clear signal on China's unwavering efforts to control financial risks on the basis of stabilizing investment growth, after a fall in property sales weighed on local land sales - a key source of income for local governments, affecting their debt paying ability, analysts noted. 

"China will strictly block the 'backdoor' of illegal debt issues, strengthen management of risk sources, and require stricter screening of local construction projects to avoid having new projects funded by new 'hidden debt'," Vice Finance Minister Xu Hongcai said at a press briefing of the State Council Information Office on Thursday.

Asked whether the authorities would consider replacing local debt with central government debt, Xu said China does not have any such arrangement and will firmly stick to fending off and addressing local government debt. "Such an option needs to be carefully studied," he said. 

Chinese local governments' ability to repay their debts has sparked some concerns in recent months, after land sales slid amid an ongoing slowdown of the property sector. 

"Land revenue accounts for 40 percent of local government revenue across the country, and the smaller the city, the more dependent it is on land revenue. Therefore, as the real estate market cools, the ability of localities to repay their debts will be affected," Cong Yi, a professor at the Tianjin University of Finance and Economics, told the Global Times on Thursday.

Local governments used to source the bulk of their income from land sales. A report issued by the China Property Data Research Institute showed that 12 Chinese cities' finance reliance on land sales has topped 100 percent, with Wenzhou, East China's Zhejiang Province ranking first with a rate of 179 percent.

In the first 11 months, property investment expanded 6 percent year-on-year, compared with a 13.2-percent rise in the same period last year, according to data released by the National Bureau of Statistics (NBS).

Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, predicted that property investment will edge up at the beginning of next year, as Chinese regulators have shown signs of a relaxation on financing by real estate firms, including bond issuance.

"But it's still vitally important for local governments to put the brakes on ballooning local debt to control their financial risks. Meanwhile, the authorities should arrange to pay off existing debts to defuse risks," Dong told the Global Times on Thursday. 

Cong said that local governments should rely on future revenues to relieve their debt burdens and not borrow more to pay off old debts, creating a vicious cycle.

At the press briefing, Xu said the Ministry of Finance is guiding local governments to draw up quotas for special-purpose bonds to ensure "a considerable quantity" of such bonds is issued in the first quarter next year.

That indicated the government will moderately increase the scale of local debt issuance next year to strengthen major infrastructure construction and improve people's livelihoods, while also adopting a stricter audit system to prevent the disorderly expansion of local debt and defuse the risk of invisible debt, according to Cong. 

Dong said that local governments must use special-purpose bond revenue more efficiently to boost major infrastructure projects, playing a bridging role to drive more social and private capital into key projects.

"Issuing special-purpose bonds is also an efficient way to prop up fixed-asset investment, a key driver underpinning the economy in the fourth quarter and next year," Dong said.  

Analysts said that local borrowing programs should focus on the shortcomings of local development, as well as optimizing local infrastructure investment, in order to generate revenue from these stable investments.

As of December 15, China had issued new special-purpose bonds totaling 3.42 trillion yuan ($537 billion), accounting for 97 percent of the quota allocated, according to the Ministry of Finance. That means China has completed this year's special-purpose bond issuance work.