China's chief financier Liu Zhongli is a man in the hot seat. At the National People's Congress last week, the finance minister struck an upbeat note on control of the soaring budget deficit. The mainland chalked up a shortfall of 62.14 billion yuan (about HK$57.79 billion) last year, lower than the planned 66.68 billion yuan, thanks to faster growth of revenues than expenditures. If Mr Liu's forecasts are correct, China will have an even lower deficit of 61.44 billion yuan this year, reversing the trend of rising budget deficits since 1986. The improvement will mark a significant step towards the mainland's long-standing goal of a balanced budget by the end of the century. Beijing would appear to have stopped bleeding red ink. Or has it? Chen Xingdong, Crosby Securities economist in Beijing, said China had partly achieved the target with better implementation of the budget last year. 'On the one hand, you see the government narrow the gap between total revenues and total expenditures.' On the other hand, China was locked in a vicious cycle of domestic debt issuance because it had entered into the peak period of domestic and foreign debt repayment, he said. So the budget deficit figures tell only half the story. If the funds for servicing debts - 133.17 billion yuan - are taken into account, the deficit will have soared to 195.26 billion yuan this year, the size of the government bond issues. It is 27 per cent more than the 153.77 billion yuan worth of government bonds issued last year, including the 86.93 billion yuan for repaying principal and interest. Mr Chen said Beijing would have to increase government bond issues by 15 per cent next year to cover the budget deficit and debt repayment. Hongkong Bank China Services research manager Benny Chiu said: 'If the debt servicing part is included, China has an increasingly heavy burden of budget deficit.' Another problem was that China was spending a growing amount of debt money for non-productive uses, he said. This year, 68 per cent of the proceeds raised from government bond issues will be set aside for debt servicing, compared with 56 per cent last year. Government bonds have been used increasingly by the Ministry of Finance to offset budget deficits because it has not been allowed to cover the shortfall by borrowing from the central bank since 1994. So the size of government bond issues has increased substantially for the past two years. Mr Chiu said the rising deficit underscored the central government's weakening functions of resources allocation and stimulating economic development. The national budget revenues have accounted for a declining portion of the country's gross domestic products (GDP). It is estimated that the ratio will drop to 10 per cent this year, compared with 23.1 per cent in 1980. The most conspicuous policy change in this year's budget is that China plans faster revenue growth than expenditure, albeit by a meagre 1 per cent. Schroders Securities economist Tao Dong said: 'It is encouraging to see China has realised that, besides using tight monetary policy, it needs to address the problem of the fiscal budget deficit that is fuelling inflation. 'Whether it will succeed, we have to wait and see.' Mr Tao said ballooning government bond issues would impose inflationary pressures on the credit side as private enterprises were crowded out of business loans. In addition, prices of commodities would be bid up because of the expansion of credit, he said. Finding a resolution to the budget deficit problem is not easy. Mr Chiu said the problem stemmed from China's economic reforms since 1979. The reforms were tantamount to policies of 'government subsidies' as numerous tax breaks were granted to encourage economic development. 'The aim of an economic opening policy was to reduce government subsidies under the state planning but, ironically, the state has been offering subsidies both to domestic and foreign enterprises to stimulate economic development,' he said. Put simply, to strike an equation of a balanced budget means increasing revenues as well as slashing expenditures. Tao Liming, deputy director of the Bank of China's Institute of International Finance in Beijing, said: 'In the short term, it is better that China focuses on reining in expenditures, if it wants to improve the deficit situation.' The controls would be in line with the state's belt-tightening policy of curbing investment in fixed assets. But on the revenue side, it would be more difficult and take longer for the measures to become effective, he said. China has begun to eliminate various tax perks as part of its move to level the playing field for domestic enterprises. Theoretically, it will boost national revenues, but benefits will be countered by Beijing's lowering import tariffs as it wants to hasten entry to the World Trade Organisation. The finance minister predicted that this year's national budget revenues would be cut by 4 per cent as a result of a reshuffle of the tariff policy. Another major drag on revenues will be the state's burden of value-added tax rebates on exports which amount to 50 billion yuan in arrears. They are expected to be paid back to exporters in the next two years. Deepening reform of state-owned enterprises and thereby raising their contribution to national revenues also is not easy to achieve in the short term. Although some observers have proposed China issues long-term bonds to mitigate the debt servicing pressure in the short term, Mr Tao said it was not a viable option under the circumstances. China's unstable economic performance and investors' concern over the government's ability to repay were problems, he said. Little wonder Mr Liu described achieving a balanced budget as a 'formidable task' when he concluded the speech last week.