LIU Zhongli has a major problem. Not only does China's finance minister have a record budget deficit to contend with, he plans to cover that deficit by issuing treasury bonds. In the past, the Government covered its debts, about 20 billion yuan (about HK$17.72 billion) a year for the past three years, with low interest loans from the central People's Bank of China - a convenient, if not exactly fiscally responsible, method of lending money to itself. This year, the finance ministry decided to make up the shortfall in the regular state budget (projected to be 67 billion yuan under the new system of budget calculation) by issuing government bonds. The 48 billion yuan required for servicing domestic and foreign debt will also be covered by issuing bonds on domestic and overseas markets. China's total projected debt for this year, including the utilisation of foreign loans, is 129.2 billion yuan, up 39.3 billion yuan on last year, or 3.8 per cent of the gross domestic product. Mr Liu, in his budget report delivered to the National People's Congress (NPC) on Friday, said with a certain degree of understatement ''the total bond issue for this year is rather large''. And here lies the problem: while Beijing's debt rating on international markets might be quite healthy, no one in China wants to buy treasury bonds. The first two tranches of this year's issue, five billion yuan in six-month bonds and 10 billion yuan in three-year bonds, have flopped badly and the third tranche has had to be postponed by a month until April. Officially, the failure of the issue was blamed on ''hesitation'' on the part of the local government organisations charged with distributing the bonds, a point taken up by Mr Liu in his address to the NPC. ''We need the understanding and support of leaders at all levels and people throughout the country for a successful bond issue,'' he said. But it will take more than understanding and support to reverse the decline in bond sales in recent years. Sales of treasury bonds through the market have declined rapidly over the last three years as more attractive investments have become available on the Shanghai and Shenzhen stock exchanges and the legal-person share market. In 1991, 32 per cent of all treasury bonds issued were sold on the open market. In 1992, that figure fell to 12 per cent and last year the proportion of market sales plummeted to just five per cent. This year, with twice as many bonds on offer as last year, the figure is expected to be even lower. Analysts said the only way to make treasury bonds more attractive to investors was to issue more short-term, high-interest debt but it was doubtful if the conservatives in the central Government would agree to such a ''high risk'' tactic. Indeed, there was no mention of higher interest rates in Mr Liu's budget report. Instead, he concentrated on improving the method of issuing bonds and boosting the secondary market. ''We need to . . . improve and expand the primary dealer system and standardise and develop the secondary market. ''Financial departments must co-operate with banks and other relevant departments to ensure that priority is given to issuing bonds. Funds for old age pensions and the balance of postal savings accounts should be mainly invested in bonds,'' Mr Liu said, indicating the Government was prepared to use coercive administrative measures to make sure all its bonds were subscribed. Whether or not the local governments will be willing to play ball, however, remains to be seen.