China should further increase the local governments' debt ceiling and develop more financial instruments as a tightening credit environment makes it tough for local governments to obtain funding for infrastructural construction, said a report by a Beijing-based think tank.

With a tightening credit environment, local governments are faced with greater challenges to raise money to support infrastructural construction, according to a report by CF40 Finance Forum.

Funds raised through direct financing channels, such as bond issuance, only take about less than 50 percent, while about 40 percent of local government financing come from short-term expensive products, according to the report.

Zhang Bin, a senior researcher with the think tank, said products such as Real Estate Investment Trusts (REITs) should be encouraged more to meet long-term financing demand.

REITs by qualified issuers allow individual investors to acquire ownership in real estate portfolios that receive revenue from properties.

Still in its nascent stage in China, real estate investment trust products are expected to become a promising alternative for local governments, he said.

REITs are able to reduce debt leverage ratios and lower risks by financial intermediates, and serve as a relatively low-risk option for Chinese households as they have ever-increasing demand to invest more other than saving, he said.