China should establish a more market-oriented and standardized system for local government financing partly to fuel the enormous capital need of its urbanization, a central bank official said Tuesday.

Pan Gongsheng, vice governor of the People's Bank of China, said at a meeting that debt burdens of local authorities have been increasing rapidly in recent years. They relied on local government financing vehicles (LGFVs) or companies set up by local authorities to raise funds and bypass restrictions on direct government financing.

China bans local administrations [Businesses Registration]from borrowing directly from banks and has only allowed a few regions, including Shanghai and Guangdong, to issue bonds directly.

A lack of direct financing channels has forced local governments to circumvent the rules by setting up thousands of LGFVs to raise funds.

After China's banking regulator ordered commercial banks to strictly control loans made to LGFVs starting in 2010, many local administrations were forced to turn to shadow banking, which boosted their financing costs, Pan said.

To build a more transparent and rule-based financing system, Chinese cities should be allowed to issue bonds directly, different from the current practice of bond issuances through government of a higher level, he said.

Pan added that the country should accelerate the development of a multi-tiered capital market and improve the [Hong Kong Company Formation & Registration]long-term process for local government financing.

The National Audit Office said last week that liabilities directly carried by administrations at various levels stood at 20.7 trillion yuan (3.4 trillion U.S. dollars) at the end of June, up 8.6 percent from the end of 2012.

In breakdown, direct central government debt stood at 9.81 trillion yuan at the end of June. The remaining 10.89 trillion yuan was borrowed by local administrations, an increase of 13 percent from the end of 2012.