China to cut 2007 budget deficit to 1.1 pct of GDP

BEIJING, March 5 Sun Mar 4, 2007 11:01am EST

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BEIJING, March 5 (Reuters) - China plans to cut its 2007 budget deficit to 245 billion yuan, or 1.1 percent of gross domestic product, the finance ministry will project in a report to parliament on Monday.

That compares with a deficit in 2006 of 275 billion yuan ($35.5 billion), or 1.3 percent of GDP, which was well below the government's initial target of 295 billion yuan.

The report projects national fiscal revenue in 2007 of 4.4 trillion yuan, 13.8 percent more than in 2006, with total spending of 4.65 trillion yuan, an increase of 15.7 percent.

The central government will allocate 130.4 billion yuan for investments this year, 15 billion yuan more than last year.

Of that sum, 50 billion yuan will be funded by the issuance of treasury bonds -- down from 60 billion in 2006.

The government has been gradually reducing the volume of long-term bonds, which it launched to prop up the economy in the wake of the 1997/98 Asian financial crisis.

The finance ministry also proposes a ceiling for the outstanding stock of treasury debt in 2007 of 3.787 trillion yuan, 248.4 billion yuan more than in 2006.

The report, excerpts of which were seen by Reuters, says China will set up a contingency fund of 50 billion yuan.

"The central budget stabilisation fund is a special fund to offset the gap between income and expenditure when national revenues fall short of the budget," the ministry says.

Beijing will also pave the way for state firms to start paying dividends by launching, on a pilot basis, what the report calls a "budgetary system for the operation of state capital".

Analysts say the scheme is the first step towards requiring large state-owned enterprises to pay dividends to the central government depending on their financial health.

All centrally controlled companies and tobacco firms will be involved in the new scheme this year.

"This is to promote strategic adjustment in the landscape of the state-owned economy, require (state firms) to pay the necessary cost of reforms and to regulate the distribution of wealth between the government and state enterprises," the report says.

China's 161 centrally controlled state-owned enterprises (SOEs), which earned a combined profit of 1.1 trillion yuan in 2006, have been allowed since 1994 to retain their earnings to fund expansion.

Getting SOEs to pay dividends is aimed at forcing big companies to think twice before investing blindly and at raising cash for the government to pay for infrastructure and public services. ($1=7.74 yuan)

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