Containing local government debt has been a challenging mandate for policymakers in China, but there are signs that the country is starting to get a grip on the problem. China's banking regulator has issued detailed guidelines to clean up the lion's share of the country's local government debts.

That's according to local media reports. Under the guidelines, local government financing vehicles that can fully cover loans with cash and have projected returns on investment, can obtain new bank loans.

Those with incomplete projects are required to meet with banks, and can only roll over their loans once. For financing vehicles with loans not covered by cash flows, but have projects with the potential to attract investment, their loans can be restructured.

Meanwhile, new loans will not be extended to financing vehicles that cannot cover loan repayments and with projects unable to attract private investment. As of end of 2010, local government debt in China was estimated at over 10 trillion yuan.

Reports say 35 percent of the bank loans extended to local government financing vehicles are due to mature in the next three years.

Last Wednesday, Chinese Premier Wen Jiabao announced that net local government debt rose by just 300 million yuan, or around 47 million dollars in 2011.

Earlier today, Moody's Investor Service noted that the containment of local government debt is good news for China's credit standing, greater discipline in the financial sector and improved transparency.

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