In the end, further increasing state stimulus bond issuance -- set at 150 billion yuan (US$18 billion) this year -- would likely be a last resort to be used if the economy deteriorated sharply, they add.

On one side of the debate is the State Development Planning Commission, which supports big government-funded projects. The commission is calling for the additional issue of 50 billion yuan in bonds to power the slowing economy.

"I don't believe there will be any trouble if the government issues more bonds this year," said Zhang Hanya, head of the commission's Investment Research Institute.

"There is a huge excessive liquidity at banks as their deposits have far exceeded loans," he said.

Deposits at Chinese banks now exceed their loans by a staggering 2.7 trillion yuan and analysts say the government could harness these funds with bond issues.

On the other side is the Ministry of Finance and lawmakers, who must approve any increase to the special state bond issuance alloted for this year. Some lawmakers say excessive state spending has caused waste of funds, and may bring risks.

"I oppose it because the effectiveness of debt-backed spending has been limited in recent years," said a senior government economist who declined to be identified.

"There is room for issuing state debt, but the question is where to spend the money. I don't think it's necessary to boost investment in infrastructure."

Global Economic Slowdown

China's economy is still humming, rising 7.9 percent year on year in the first half of 2001, but the second half will feel more pain from the global economic slowdown, analysts say.

The economy grew an annual 8 percent last year.

China's exports rose 8.4 percent year on year in the first seven months of 2001, well off the blistering 27.8 percent surge for all of last year, officials figures showed.

With export growth weakening, domestic consumption and state investment have taken up the slack, but analysts are sharply divided on the strength of consumption.

During the annual summer gathering of China's leaders at the Beidaihe beach resort, the State Development Planning Commission suggested increasing bond issuance but ran into stiff opposition, sources said.

The Ministry of Finance and others worry about the unpaid bill for reforming ailing state banks and the underfunded pension system, which will strain financial resources in future.

"China's fiscal policy should reserve some power," said Min Tang, chief economist for the Asian Development Bank in China. "It can be only used when things are getting critical."

"Resolving the problems in the banking system, social security and other reforms all need money," he said.

China implemented an expansionary fiscal policy in 1998 after taking a hit from the Asian economic crisis, issuing 360 billion yuan in special bonds for infrastructure in the last three years to stimulate the economy.

Finance Minister Xiang Huaicheng has said the expansionary fiscal policy would continue for the next two to three years, but also pledges to gradually phase out the policy.

Analysts say the government budget deficit -- set at a record 259.81 billion yuan this year -- is manageable for now as it comprises less than 3 percent of GDP.

NEW STRATEGIES

Chinese Premier Zhu Rongji called for "new strategies" earlier this month to compensate for slowing export growth to sustain the economy.

Policymakers are thinking about a number of other ideas to boost the economy besides fiscal measures. They include a salary increase for civil servants to help lift consumption as well as easier credit for house and car buyers, analysts say.

Some government economists are also lobbying for monetary policy to play a greater role in spurring the economy and have urged the central bank to further loosen credit, such as cutting the interest rates.

China aims to keep the economy growing by at least 7 percent this year to create enough jobs for laid-off workers and boost rural incomes to keep up a huge domestic purchasing power and strong consumption, which in return could sustain strong economic growth.

(China Daily 08/27/2001)