This new framework will contribute to the central government's goal of having local governments take direct responsibility for their debt and encouraging them to borrow and invest more prudently.

To deter local governments from engaging in riskier transactions, such as off-balance sheet borrowing, the State Council debt guidelines introduce tougher sanctions against local officials found guilty of violations. This is an extremely important measure that will force local officials, even at the most senior level, to adopt a more prudent approach to borrowing.

It is difficult to forecast how the market will develop after 2015.

It is also difficult to predict how long it will take for a fully functioning municipal debt market to emerge, because the central government is still establishing the regulatory framework and the accounting systems.

Developments this year will be closely watched by investors. The local debt issued under the pilot program has received a very positive reception from onshore investors.

Investors will also begin to differentiate between the direct debt obligations of local governments and debt issued by local government financing vehicles.

Domestic municipal debt could become a new asset class, allowing investors to fine-tune their exposures. These instruments could also create more trading opportunities.

The author is a vice-president and senior analyst covering sub-sovereign debt at Moody's Investors Service in Beijing.