China plans to issue long-term construction treasury bonds totaling 1 trillion yuan over the next two years to support the country's 4 trillion yuan stimulus package, a central government official said.

"The central government is likely to issue 500 billion yuan in bonds annually over the coming two years. The remaining money in the stimulus package is likely to be composed of local fiscal revenue, local government bonds and low-interest loans from State-owned banks," 21st Century Business Herald quoted an anonymous official with the National Development and Reform Commission (NDRC) as saying.

Concrete plans related to the package are expected to be announced at the Central Economic Work Conference, which will be held next month.

According to a report from Merrill Lynch, after the issuance of the bonds, China's fiscal deficit is estimated to reach 2.5 percent of GDP in 2009 and 2010.

Based on international experience, the country's financial system will remain in a safe range as long as the fiscal deficit remains below 3 percent of GDP.

"China has much space to issue bonds to afford the huge stimulus package, since the national debt to GDP ratio is only 18 percent," said Frank FX Gong, chief China economist at JP Morgan.

"Even if the entire 4-trillion-yuan stimulus package is financed by new government debt, the national debt to GDP ratio will remain less than 35 percent, compared to 75 percent for the US, 150 percent for Japan, and 50-100 percent for most emerging markets," Gong said, adding the situation today is different from the Asian financial crisis in 1997-98.

Earlier, some overseas news agencies reported that China was likely to use foreign exchange reserves to support the stimulus package and sell a large amount of US bonds, but industry experts advised against this.

China has huge foreign exchange reserves, which amount to $2 trillion.

"However, this fiscal stimulus policy aims to spur domestic demand and foreign exchange reserves can only be used when importing equipment or materials from overseas markets, which can't have too much impact on the whole stimulus fiscal plan," said banking industry expert Yu Yaotian.

"Foreign exchange reserves will be the last choice for raising money, since many international factors should be considered. Even if China plans to sell US bonds, the process will take one to two years," Yu added.

Experts also point out that the characteristics of the projects should be taken into consideration when selecting the source of money.

"Those projects that can get stable revenue after completion, such as building bridges, can raise money from society," Zhao Xijun, vice-president of the School of Finance at Renmin University of China, said.

Large-scale infrastructure construction projects, which require planning and cooperation between different regions, like railway construction, must have central government involvement."

(China Daily November 14, 2008)