BEIJING, Oct. 25 (Xinhuanet) -- Allowing local governments to issue bonds for the first time is credit positive for China, Moody's said yesterday.

The Ministry of Finance said last Thursday that it will start a trial program that will allow the governments of Shanghai and Shenzhen cities as well as Guangdong and Zhejiang provinces to issue bonds for the first time. The central government's move may narrow financing shortfalls and prevent debt defaults by overextended provinces.

Moody's said in a weekly credit outlook report that the move may yield benefits for local governments seeking access to capital market funding, help develop a municipal bond market, and is therefore credit positive for China as it will enhance fiscal transparency and discipline.

Under the pilot program local governments will be able to get financing from diversified sources. If the scheme is successfully developed, it promises to reduce local governments' reliance on banks for funding for infrastructure programs. Since capital market investors demand more detailed information and disclosure, the report said an improved public-sector transparency and fiscal discipline will result.

Numerous financing vehicles set up by local governments have mired local authorities with total debt of about 10.7 trillion yuan (US$1.7 trillion), equal to 27 percent of the country's gross domestic product last year, since the global financial crisis in 2008, the national audit office said at the end of 2010.

The financing vehicles, set up to support construction projects, are due to pay a total debt of 1 trillion yuan annually from this year till 2013, China International Corp warned in an earlier note.