China is expected to issue 1.4 trillion yuan (US$205 billion) of bonds this year to offset a relatively huge budget deficit in light of an economic downturn, an industrial organization said in a report.

The government's proactive fiscal policy, such as the 4-trillion-yuan stimulus plan, and the slowing economy will lead to a relatively huge budget deficit for this year, so it needs to expand bond issues to offset the deficit, said the National Association of Financial Market Institutional Investors.

The association projected that China's non-financial firms would raise nearly 1 trillion yuan of commercial paper and medium-term notes this year as part of the country's efforts to reform the corporate bond market to ease reliance on bank loans.

China resumed registering medium-term notes for non-financial companies in October to offer an alternative funding source against the backdrop of the global financial crisis. The issues of such notes had been halted for three months since April.

Medium-term bonds, usually maturing in five to 10 years, are traded in China's interbank market, which is open mainly to financial firms such as banks and insurers.

The government support will help the debt market grow strongly this year with the introduction of more products such as asset-backed securities and real estate investment trusts, or REITs, the report said.

Fang Xinghai, director of the Shanghai Financial Services Office, said last month that Pudong New Area will spearhead the introduction of REITs this year to help developers expand funding channels.

For real estate developers, a REIT provides more access to funds while investors have the choice to opt out or rotate portfolios within the REIT.

China has launched several measures to boost the bond market, including scrapping trading fees for bond transactions and allowing listed banks to trade debt on stock exchanges.

(Shanghai Daily February 4, 2009)