The massive issuance of treasury bonds started in China in 1998, when the shadow of deflation was hanging over the nation and the government hoped bigger budgets could keep the economy on the right track.

Treasury bonds worth 360 billion yuan (US$43.5 billion) were issued in the past three years, and the government is planning to issue a total of 150 billion yuan (US$18.1 billion) this year.

The bonds stimulated local governments and enterprises to invest 750 billion yuan (US$90.6 billion) in infrastructure construction and technological upgrade in the past three years.

They contributed to two percentage points of the growth of the country's gross domestic products (GDP) in 1999 and 1.7 points in 2000.

There are calls for more bonds to be issued this year to back GDP growth as the international market looks grey.

According to the latest data by the National Bureau of Statistics (NBS), exports in May increased by only 3.5 percent and trade surplus in the month slid to US$2 billion, compared with US$3.3 billion the same time last year.

And a recent report by the National Information Centre forecasts that the export growth this year will drop to 12 percent from 27.8 percent last year.

Apparently the government will face uphill battles to boost domestic demand and offset the impact of the slowdown in foreign trade. Many say more weight should be added to fiscal policies to maintain economic growth.

However, some experts have pointed out that there is not much scope to print more bonds.

Liu Guoguang, an economist and special consultant with the Chinese Academy of Social Sciences (CASS), warned of the high risks of issuing too many bonds.

"If those bonds-funded projects could yield good profits, there would be no problem. But actually, many infrastructure projects like roads and bridges can hardly make returns and some are even running into the red," Liu said.

"Although treasury bonds can produce an instant effect in fuelling economic expansion, the risk of a debt trap must be taken into account," he added.

But Liu maintained that the government can continue the current proactive fiscal policy for one or two more years, given that the proportion of treasury bonds to GDP is still far away from internationally-accepted danger levels.

But some argue that treasury bonds should not be made the kingpin in booming domestic demand.

"There are more than 3 trillion yuan (US$362.4 billion) of deposit-to-loan surplus in domestic banks. It is a heavy burden to banks and these idle funds should be transformed into private investment," said Zheng Jianming, a professor of the University of International Business and Economics (UIBE) in Beijing.

"Tapping the potential of private capital would be better than relying on treasury bonds," he said.

In fact, some have suggested that the more bonds there are, the more difficult it will be to promote private investment.

"As more residents are in a frenzy to buy treasury bonds, there will be less money left for private firms to raise and private investment would be difficult," said Wu Jinglian, a research fellow with the State Council's Development Research Centre.

Moreover, the government would likely hike taxes to make ends meet if the profits of bonds-funded projects are meagre, Wu said, adding that it would further curb the vitality of the private sector.

According to the NBS, investment in fixed assets by State-owned entities jumped by 15.1 percent in the first quarter of this year. However, private investment in fixed assets only climbed by 3 percent in the same period.

NBS Deputy Director Qiu Xiaohua explained: "Sometimes private investors have little access to the private sector they want to enter."

How to open the market further and expand financing channels will be the top job to drum up private investment, Qiu added.

The government has made great efforts to spur domestic demand. It raised the wages of civil servants and gave more holidays to encourage consumption. And treasury bonds are always a trump card in this regard.

Yet, some experts maintain that it would be more effective to utilize other sources of investment.

"Treasury bonds are not a panacea and the government needs to consider whether it can afford to issue so much," CASS consultant Liu said. "The government can opt to give preference to private investment in taxation and finance," he said, adding that it is also important to increase the income of farmers who make up a majority of the country's population.

"It is notable that private investors are very active in the stock market. The limited access and high costs prevent them from investing in industries directly," said Zheng from UIBE.

"It is time to mobilize private investment, and treasury bonds will not be a permanent solution to propel economic development," he said.

(China Daily 07/17/2001)