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The issurance of 1.55 trillion yuan of special T-bonds for the purchase of US$200 billion of the forex reserve is seen as a more effective way to deal with the economic dilemmas facing China.

The move is intended to harness the excess liquidity in the domestic economy, said Finance Minister Jin Renqing. The cash in circulation has been blamed for the skyrocketing rise of the stock market and real estate prices that hint at an emerging economic bubble.

"China's excessive liquidity, as a result of unbalanced international trade and economic order, has also given rise to constant trade friction with foreign countries and inflation risks at home," said Dr Yin Jianfeng with the Finance Institute of Chinese Academy of Social Sciences.

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The proposed T-bond issue, the largest in China's history, would be very noticeable in its intended role of withdrawing currency from circulation, Dr. Yin said.

Another intended goal of the T-bonds was to relieve the government of the burden of its increasing foreign exchange reserve, which stood at US$1.2 trillion by the end of March, up US$135.7 billion from the end of 2006.

According to the International Monetary Fund standard, forex reserves bought through T-bonds are no longer counted in the national foreign exchange reserve, and once the transaction is completed, a sixth of China's forex reserve will be in the hands of market players.

"Without a sufficient scale, the intended role of draining liquidity may not be obvious," he said. "Because China's forex reserves were likely to continue to rise and the central bank would face more pressure in coping with excessive liquidity even after recent measures to withdraw currency from circulation."

The bond issue, whose dollar purchase would be managed by a forex investment company still in the making, will help domestic enterprises do business abroad and enhance national economic competitiveness, Jin said.

However, the issuance of the special T-bonds comes with risks.

The Financial and Economic Committee, a powerful economic affairs arm of the NPC, supported the State Council bill in a separate report to lawmakers on Wednesday, but it urged the government to speed up the process of formally establishing the forex exchange investment company by issuing detailed management methods and improving its risk management and market operation mechanism.

"Such measures are necessary because the treasury bonds are huge in scale and incurring interest must be considered," the NPC committee said.

"In face of the volatile international economic situations, the funds should be managed under tight supervision," it said.

Moreover, the proposed measures may need extra time to see their goals realized.

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