Ha Jiming, managing director, Goldman Sachs Group Inc's investment banking division

China should allow more local governments to sell municipal bonds to increase the transparency of their debts and defuse financial risks, said Ha Jiming, managing director of Goldman Sachs Group Inc's investment banking division.

During the last few years, many local governments have increased their use of trust products to secure financing for major projects, thereby raising concerns that local debts are hidden from view due to trust products' lack of transparency and high risk, Ha said on the sidelines of the Sanya Forum, a high-profile gathering of top-ranking business executives, think-tank leaders and policymakers.

"Local governments should replace the opaque trust products with municipal bonds, which are subject to rigorous credit rating, can attract more buyers and can help bring down borrowing costs," he said.

Earlier this year, the Ministry of Finance allowed 10 local governments, including cities like Beijing and Shanghai as well as provinces like Guangdong and Jiangsu, to sell bonds directly to fund development projects. Statistics from the National Audit Office showed that by the end of June 2013, local government debt in China had reached 17.89 trillion yuan ($2.89 trillion), including 10.89 trillion yuan directly born by local governments.

Excess debt and investment-led overcapacity have caused unbalanced economic growth and will continue to pose risks to China's financial stability next year. Some companies may have difficulties in repaying their debt, Ha said.

"China needs to restructure its economy to achieve a more balanced growth by reducing the contribution of investment to GDP," Ha said. "The economy will inevitably undergo a process of reducing overcapacity and debt, which can be either quick or slow."

He said that if China lowered the contribution of investment to GDP from 48 percent to 40 percent by 2020, its average annual economic growth would slow down to 5.3 percent in the next five to 10 years, but its debt-to-GDP ratio would start falling after hitting 59 percent in 2017.