Debt problems at China's local level have been prevalent for years. With increasing concerns over local government debt risks, calls are increasingly becoming stronger to reform tax policies and regulations. Researchers and bankers spoke out about the issue at the three-day Lujiazui Forum which opened recently in Shanghai. Edited excerpts follow:

Jia Kang, Director of the Research Institute of Fiscal Science at the Ministry of Finance: Two ratios in the Maastricht Treaty, or formally, the Treaty on European Union, namely the government debt-to-GDP ratio of 60 percent and deficit-to-GDP ratio of 3 percent, have been used globally to determine the safety of government debt. Government debt is considered at a safe level if it is below the two internationally recognized "warning lines" - or at a dangerous level if it exceeds the lines. China's government debt-to-GDP ratio and deficit-to-GDP ratio are both relatively low according to the warning lines. Its local government debt amounted to 10.7 trillion yuan ($1.7 trillion) at the end of 2010, accounting for about 27 percent of its GDP. As its public sector debt as a percentage of GDP reached about 20 percent in nominal terms, China's total government debt totaled close to 50 percent of GDP, and be well within the safety zone, even if bonds issued by policy financial institutions were taken into account.

Its seemingly huge local debt won't pose direct threat to China's financial fitness and cause an overall crisis. But we should see that risks are accumulating and cannot be ignored. Risks in some projects are quite high because of a lack of public supervision and transparency.

Qian Wenhui: Executive Vice President of Bank of Communications: Local governments have many resources at hand, such as land rights and shareholding in many large state-owned enterprises. Unlike their European counterparts, China's local governments can mobilize resources with relative ease to help repay their loans.

In absence of direct financing channels, selling land remains the most important source of local governments' revenue, but the ongoing national administrative and monetary clamp on real estate development and speculative property trading has a chilling effect on their fiscal conditions.

Without land sales, the financing platforms won't be able to sustain themselves.

Wu Jiang: Deputy Director of China Development Bank's Business Development Department: We are confident in the future of government financing platforms. The reason for the optimism lies in the great potential of the country's urbanization prospects. It would take another two or three decades for China's urbanization rate to reach 80 percent, up from the current 50 percent. The demand for capital remains huge.

In addition, the government debt is mainly used to stimulate infrastructure projects and is thus fundamentally different from those in Europe that were driven by excessive consumption.

Much-needed reform

Qian Wenhui: I think there are two solutions to the financing difficulties of local governments. Firstly, market-oriented reform must be conducted. Actually, the government should not take care of everything about financing. Why not open the door to other investors? For some projects with a sound business model, such as highways, other types of investment should be encouraged. Local governments do not need to take so much financing responsibility.

Secondly, for those projects that do not have a sound business model, other investors could also be allowed to join in while the government providing some subsidies. The Shanghai Municipal Government subsidized more than 10 billion yuan ($1.6 billion) for its metro every year and investors were chosen through open tender. Shanghai has set a successful example for the other regions.

Jia Kang: After decades of development, China has reached the point where it's time to introduce another round of tax reforms. In 1994, China introduced the tax-sharing system, which categorized China's tax revenues into central taxes, regional taxes, and central/regional government shared taxes. The system has entitled the Central Government access to tax revenue, but eventually led to the local governments' financial difficulties. The current fiscal system allows the Central Government to take more than half of tax revenues, leaving a smaller proportion for local governments.

The unbalanced tax division has, to some extent, made local governments turn to non-tax income, such as land sales, to increase income.

A redistribution of tax revenue is one way of dealing with the issue, since the responsibility of governments should be fairly matched with its fiscal power.