BEIJING: China's new budget law which allows regional governments to raise debt by themselves would improve the transmission mechanism of the country's monetary policy, a senior economist at the central bank said on Friday.

The Chinese parliament on Sunday successfully amended its fiscal rules to let regional governments sell bonds on their own to raise cash, clinching a vital reform that could help diffuse the risks around China's $3 trillion local debt problem.

Under the revised rules, Chinese regional governments will have to publish and adhere to their budgets, a change that policymakers hope can stop officials from spending and raising funds illegally.

Ma Jun, the chief economist at the central bank's research department, said in an email to Reuters that the new law would improve the results of monetary policy adjustments by rendering spending habits more sensitive to interest rate changes.

"It would substantially improve the fiscal visibility of local governments and restrain their impulses to borrow heavily," Ma said, adding that some local governments and state firms are not sensitive to rate changes currently.

The political clout of regional governments have enabled many to borrow profusely from Chinese banks at favourable rates. Critics say the generous supply of credit distorts demand and encourages wasteful spending.

Because state companies and regional governments are indifferent to rate changes, China at present focuses on quantitative policy targets, such as money supply.

"In future, the intermediate objective could focus more on prices, such as the interest rates," Ma said.

China's regional governments are responsible for the bulk of the country's public expenditure, but take in less than their share of total fiscal income compared to the central government.

Strapped for cash since the old rules barred regional governments from taking on any loans to enforce fiscal discipline, governments resorted to bending the rules by borrowing heavily through firms that obfuscated their debt levels.

Chinese regional governments received 53 per cent of China's total fiscal income in 2013, but were responsible for 85 per cent of total spending, government data showed.

http://articles.economictimes.indiatimes.com/2014-09-05/news/53602181_1_local-governments-ma-jun-fiscal-rules