(Yicai) Oct. 23 -- China’s government ought to issue CNY 2 trillion (USD280.5 billion) of special treasury bonds to boost investment in public welfare, unlock prospective economic growth, and set up a stock market stabilization fund, according to a government-affiliated think tank.

The fund would trade major blue-chip stocks and exchange-traded funds to support market stability, the Institute of Finance & Banking, a body under the Chinese Academy of Social Sciences, proposed in a third-quarter report on China’s economy published on Oct. 22.

The People's Bank of China, the country central bank, has been studying setting up a stock stabilization fund, Governor Pan Gongsheng reportedly said on Sept. 24 when announcing a slew of economic support measures.

The special bond sale would also enable the government to increase investment in public welfare, including elderly care, childcare, education, healthcare, and affordable housing, the report said, thereby helping to boost demand among middle-income consumers and freeing up the economy’s growth potential.

Special bonds are a form of government debt issued for specific purposes, such as financing infrastructure projects. China has used special bond sales in the past to stimulate the economy, particularly during slowdowns.

Moreover, the funds raised would enable the government to provide more support for the service sector as well as small and medium-sized enterprises, which are significant employers, the Institute of Finance & Banking said. That would steady household income expectations by supporting flexible working and university graduates, returning migrant workers, and other laborers.

Also as part of the measures to stabilize the stock market, the think tank proposes that the PBOC provide low-cost liquidity support, when necessary. It also suggests moderately increasing the share of insurance company funds allowed to invest in the market and raising the that of local social security funds that are indirectly invested to accelerate the inflow of long-term capital. 

The central bank should also disclose the inflation indicators and the control targets it focuses on, and anchor the market's long-term inflation expectations at a reasonable level through credible policy operations, according to the think tank. For example, monetary policy can be fixed to the 2 percent inflation target, with a commitment to easing until the target is met.

Inflation rose 0.4 percent in September from a year ago, after climbing 0.6 percent in August, the most since February. September’s figure represented the eighth straight month of gains, but at the slowest pace since June.

Editors: Tang Shihua, Martin Kadiev