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China, taking advantage of its stable economy, will continue to cut the amount of long-term treasury bonds it issues this year, predicting the economy will not suffer a slowdown.

Reliable sources close to the subject said the government will issue 60 billion yuan (US$7.4 billion) worth of special bonds in 2006, 20 billion yuan (US$2.5 billion) less than last year.

Fewer bonds are being issued in order to limit investment in construction and in certain infrastructure industries, such as steel and cement.

On the other hand, the government will also need to increase its spending in other sectors such as the development of rural and agriculture areas to balance the economy.

The government may also reduce its budgeted fiscal deficit by about 5 billion yuan (US$616.5 million) to 295 billion yuan (US$36.4 billion) this year, the sources said.

"The reduction in the amount of the special bonds and the budgeted deficits suggest the country plans to speed up withdrawing from the proactive fiscal policy," said Peng Longyun, a senior economist with the Asian Development Bank's Resident Mission in China.

The country has already withdrawn from the proactive policy, which is characterized by increasing government expenditure on projects such as infrastructure, ports and power generation, he added.

Aiming to curb over-investment in these industries since the second half of 2003, the government reduced special bond issuance by 30 billion yuan (US$3.7 billion) to 110 billion yuan (US$13.6 billion) in 2004.

It also kept the fiscal deficit virtually unchanged in 2004 compared to 2003. As the economy grew, the ratio of fiscal deficit to the gross domestic product (GDP) dropped in 2004.

Last year, the government reduced special bonds by another 30 billion yuan (US$3.7 billion) to 80 billion yuan (US$9.9 billion).

It also reduced the fiscal deficit by 19.2 billion yuan (US$2.4 billion) to 300 billion yuan (US$37 billion). The ratio of deficit to GDP dropped to about 2 percent.

"The ratio of fiscal deficit to GDP will continue to drop this year," Peng said.

Zhang Xueying, a senior economist with the State Information Centre, said it is necessary for the government to continue issuing a certain amount of special bonds this year, because it needs money to complete construction projects.

However, the special bonds have already become less important to the entire investment, he said.

"It is the market factors which contribute the largest to the total investment," he said.

Zhang Liqun, a senior researcher with the State Council Development Research Centre, agreed the country's fixed asset investment no longer relies on treasury bond issuance.

A reduction in special bond issuance and the budgeted fiscal deficit is a continuation of the prudent fiscal policy adopted since last year, he said.

"This is in line with the present economic development," he said.

The government will continue to increase investment in the weak social and economic areas, he said.

"The prudent fiscal policy should focus more attention on building a harmonious society," he said.

Finance Minister Jin Renqing said last December that the government will continue emphasizing increases in rural people's income and the development of agriculture and rural areas.

The government will call off the agriculture tax across the country this year, Jin said.

It will also increase financial support to rural medical care, education, science development, and construction of environmental and culture facilities in rural areas.

Such investment is estimated to reach 100 billion yuan (US$12.3 billion) this year.

Jin noted that the country will increase fiscal expenditure to areas such as employment, social security, environment protection, ecological construction and education.

The government will also give key support to companies' technical innovation, Jin said, without giving detailed figures.

According to Jin, the government will continue to increase support for development of the country's central and western areas and the renovation of old industrial bases in the northeast.

Development in the old revolutionary base areas, border areas, poor areas and areas where minority ethnic groups live will also be backed.

(China Daily January 25, 2006)