China will "gradually float" its proposed 1.55 trillion yuan (US$204 billion) in special government bonds to fund the setting up of a new overseas investment agency, a senior central bank official said yesterday.

"The central bank will gradually sell the special bonds based on its monetary policy and the overall stability," Yi Gang, assistant governor of the People's Bank of China, told the Shanghai Securities News during a financial forum on Saturday.

Yi comments also indicated that the bonds would be initially issued by the Ministry of Finance directly to the central bank in exchange for about US$200 billion in foreign-exchange reserves to help set up the State Investment Co.

China's top legislature on Friday approved the proposal to sell the bonds and the finance ministry said the impact of the issuance on the economy would be "neutral."

Industry analysts attributed the slumps in the yuan-backed shares last week partly to the news over the bond sale on investors' jitters that such issues may soak up liquidity for the stock market.

Yi echoed the view by the finance ministry by saying that the bond sales won't exert a big impact on the market, according to the Shanghai Securities News.

The pace of the debt issuance will be controlled to keep "all aspects steady," the newspaper quoted Yi as saying.

No timetable has been offered yet for the debt sales but market watchers believed the central bank would float the bonds to institutional investors in a batch-by-batch manner within the year after buying them from the finance ministry.

The National People's Congress also on Friday voted to raise the cap on the amount of outstanding government debt by the end of the year to 5.34 trillion yuan, from the previously set target of 3.79 trillion yuan.

The finance ministry said that the increase in supply will help meet the need for treasury bonds from financial institutions including insurance companies and the social security fund.

(Shanghai Daily July 3, 2007)