As local government officials are appointed by the central government, it will be difficult to punish them if they are simply shifted to another place, he noted.

The NPC passed a revision to the budget law on August 31 for the first time since it took effect in 1995. The revision is intended to remove ambiguity and close loopholes in managing the trillions of yuan involved in State fiscal revenue and spending.

The country has witnessed ballooning local government debt following the 4-trillion-yuan ($650 billion) stimulus program and subsequent lending spree that was launched in 2009-10 to bolster economic growth after the global financial crisis.

Chinese local governments had accumulated outstanding debt of 17.9 trillion yuan by the end of June 2013, up 67 percent from end of 2010, according to official data.

As local governments were banned under the original Budget Law from issuing bonds directly, many in practice have sought backdoor funding through local government-backed financing firms, which borrowed from banks on their behalf, mostly to fund infrastructure.

Such opaque practices are off the radar for central regulators, leading to potential default risks that could imperil the country's financial system.

Backdoor financing practices used by local officials to circumvent the original rules convinced top leaders that the only way to slow the growth in China's local debt was to set up a transparent budgetary supervision mechanism.

The revised law gives the green light to bond sales by provincial governments but places them under strict supervision with detailed regulations.