China's State Council on Monday unveiled the guidelines of a fiscal reform for governments below provincial level to strengthen the management of local debt while improving a debt quota mechanism. This underscores the central government's unwavering efforts of easing debt risks amid measures to shore up the world's second-largest economy.

China will establish a reasonable mechanism for transfer payments and gradually increase the scale of general transfer payments prioritizing underdeveloped areas, the guideline said, adding that local governments will increase spending on education, science and technology research, social security, food security, as well as construction of major infrastructure projects.

The guidelines also asked local governments to strengthen debt management in development zones, maintain compliance with the financial management system, strengthen the constraints on debt financing by government agencies such as development zone management committees, resolutely curb the increase in hidden local government debt, reasonably control the scale of government debt, and effectively fending off debt risks.

China will also improve the debt quota mechanism for local governments under which the special debt quota must match revenues and project income, the guidelines added.

The latest reform comes against the backdrop of the pandemic and the increasingly fluctuating external economic environment, in addition to mounting pressures from both reduction of fiscal income and expenditure increases.

Recent statistics show that financial departments at all levels have stepped up efforts to implement proactive fiscal policies. In the first two months, the progress of budgetary expenditure was 14.3 percent, the highest in the past five years, according to data from the Ministry of Finance.

The quota of local special bonds for construction of projects has been fully issued, totaling about 1.25 trillion yuan ($185 billion) by the end of March. At present, local governments have reserved 71,000 special bond projects, Vice Minister of Finance, Xu Hongcai, said during a press conference on April 12.

The country's fiscal revenue stood at 7.43 trillion yuan ($1.1 trillion) in the first four months, down 4.8 percent year-on-year, according to official numbers. If deducing the effect of the VAT credit refund, national fiscal revenue posted an increase of 5 percent during the period. Gains eased from an 8.6 percent increase for Q1.

The reform also comes as Chinese authorities have stressed several times the importance of curbing the increase of new "hidden debt" and stabilize the mechanism that settles existing "hidden debt" to guard against systemic financial risks since last year.

The debt ratio of local governments has been under close scrutiny in recent years. The overall debt ratio of local governments was 93.6 percent in 2020, although not a high level compared to international standards which ranges between 100 percent and 120 percent.