China has seen slowing growth in local government debts since the middle of last year, an annual audit report showed on Tuesday.

The balance of debts for the nine provincial governments and nine municipal governments audited by the National Audit Office grew by an average of 3.79 percent from the end of last June to the end of March.

The figure is 7 percentage points below the average rate for the first half of 2013, according to the office's 2013 report to the Standing Committee of the National People's Congress (NPC).

According to the report, local governments at various levels were liable for a total direct debt of 20.69 trillion yuan ($3.4 trillion) at the end of last June, as well as another 9.5 trillion yuan in debts with limited liabilities.

The debt risk in this area is generally within control, the report concluded.

It also exposed a number of local debt problems such as overdue debts and investors backing out of contracts.

By the end of March, nine audited provincial governments still had previous arrears of 821 million yuan, even though they had borrowed 57.9 billion yuan over the last nine months to repay due debts.

Four out of the nine audited municipal governments financed 15.7 billion yuan through non-procedural government guarantees or mortgages, and used 10.8 billion yuan in real estate and other projects in breach of the contract.

Four provincial and municipal governments raised 6.9 billion yuan through non-public financing tools like private placement bonds, which are not in line with the rules.

Two of the 18 provincial and municipal governments do not have a debt management system and nine have not established a debt risk early-warning system, according to the report.

Also on Tuesday, Finance Minister Lou Jiwei delivered a report on the central government's final accounts in 2013 to the NPC Standing Committee for review.

Lou said in his report that his ministry will properly handle local governments' debt default cases in accordance with "the principles of the market" and highlight the role of the market in restraining local governments.

But Lou did not detail the concrete market-oriented measures for handling the defaults.

In May, the Ministry of Finance issued a document to allow 10 pilot provinces and cities, including Beijing, Shanghai and Guangdong to directly sell and repay local government bonds on their own, similar to municipal bonds. Credit ratings were later introduced to the bond-issuance pilot.

But the document did not make it clear whether or not a debt default is allowed and how to deal with it.

Market operations mean that the central government will not shoulder all liabilities to repay local governments' debts if a default occurs, said Xia Bin, a member of the State Council and a former member of the central bank's monetary policy committee.

Xia said that local governments may have to clear debts by restructuring assets.

Currently, most local bonds are issued via the Ministry of Finance. The promotion of independent local bond issuing and repayment should be accelerated in the near future, said Bai Jingming, vice-director of the Research Institute for Fiscal Science under the ministry.

On Monday, southern economic hub Guangdong province auctioned the first local government bonds at 3.84-percent, 3.97-percent and 4.05-percent yields, basically flat with comparable treasuries on the secondary market.

The bond sale reached 14.8 billion yuan, 1.85 times oversubscribed.