About half of China’s local governments may warrant junk-level credit ratings, according to the rating agency Standard & Poor’s, potentially hampering the central government’s efforts to develop a municipal bond market.

Municipal bonds are at the heart of China’s efforts to inject transparency and market discipline into local government finance, after local debt ballooned to Rmb17.9tn by mid-2013 from Rmb10.7tn at the end of 2010, according to the latest official audit.

In a bid to “open the front door and close the back door”, the finance ministry in May launched a pilot programme allowing 12 local governments to sell bonds directly. Most local borrowing in recent years has occurred through opaque special-purpose vehicles, a structure used to skirt a 20-year ban on borrowing by provinces and cities.