China needs to expand the scale of its local government bonds issuance to better understand the hidden debts of local governments, a top government think tank economist said on Tuesday.

"Bond issuances by local governments is a healthy and transparent way to get funds, but whether its size can be expanded depends on further modifications in the country's budget laws and regulatory rules," Jia Kang, head of the research institute for fiscal science under the Ministry of Finance, told China Daily.

China did not allow local governments to raise funds directly from the market before 2009, and since then has only permitted the Ministry of Finance to issue a limited amount of bonds on behalf of the fund-thirsty local governments.

After ratifications earlier this year, the country's budget law allowed local governments to issue bonds with approval from the State Council.

The insufficient funding channels have prompted local governments to set up special investment vehicles to borrow money from banks, leading to mounting default risks for Chinese commercial lenders.

The situation became worse after the global financial crisis, when the government launched the 4 trillion yuan stimulus package to help bolster flagging economic growth.

The banking regulator had earlier said that lenders may struggle to recover nearly one-fifth of the 7.7 trillion yuan they have lent to local infrastructure projects, as many of them may not generate enough returns to service the debts.

As the latest move to help address the local debt issue, the Ministry of Finance on Monday said it would sell 47 billion yuan ($6.94 billion) bonds on behalf of the local governments in the interbank and stock markets from Tuesday to Thursday.

The bond sale is the third such this year and part of the nation's plans to sell 200 billion yuan of local government debt this year. The bonds are expected to become tradable on Aug 16.

Economists have suggested additional funding channels for local governments will shift the burden from listed lenders, who financed a lion's share of the projects.

However, analysts said it is necessary to make a sound evaluation of the fiscal situation of local governments and their ability to service debts before taking the bond issuance to a larger scale.

"Local governments that lack the capacity to repay debts should be blocked from obtaining funds or pay higher interest rates," Liu Yuhui, an economist at the Chinese Academy of Social Sciences, said.