A new management method to be adopted this year will help manage China's national debt in a more effective way and reduce related risks, the Ministry of Finance has pledged.

In a report submitted to a plenary session of the 10th National People's Congress which opened yesterday, the ministry said the new system will replace a 25-year-old practice of setting annual quotas on treasury bond issuance, which has been less effective in controlling the scale of national debt and ensuring an optimal term structure, analysts say.

Under the old system, the Ministry of Finance tended to issue long-term bonds, which put less repayment pressure than short-term debt, but led to high levels of national debt.

China's debt amount stood at 2.9 trillion yuan (US$358 billion) at the end of 2004, accounting for 21.6 per cent of the gross domestic product, which was still far below an internationally recognized alarm line of 60 per cent.

This year will likely witness a surge in the issuance of short-term treasury bonds, or those due to be repaid in less than one year, which will help meet the market's long-standing thirst for such products, and possibly drive down prices of financial instruments with corresponding terms and improve yields, according to Hu Weidong, an analyst with Xiangcai Securities.

The Ministry of Finance's treasury bond issuance plan for the first quarter of this year, announced last month, notably included a three-month tranche, unseen in years.

The anticipated availability of short-term treasury bonds will also give the central bank a better choice to mop up excess liquidity in the money market, analysts say.

Chiefly due to a dearth of short-term treasury bonds, China's central bank has been issuing short-term central bank bills in the past few years to reduce the amount of liquidity in the banking system. Excess liquidity is partly a result of the central bank's purchases of excess dollars in the market, which aimed to enforce the trading band of renminbi.

Central bank bills bring the State higher costs and influence long-term interest rates in an undesired way.

Analysts have also warned against increasing the issuance of short-term treasury bonds too rapidly.

Short-term treasury bonds may dampen demand for corporate bonds with similar terms, which in China are probably less attractive to investors largely due to the higher risks. But Chinese companies are still struggling to raise more funds in the bond market, as the stock market and banking sector fail to provide adequate funding.

Source: China Daily