SHANGHAI : China's finance ministry is expected to soon issue 1.55 trillion yuan (204 billion dollars) in bonds to fund its new forex investment agency, state media said Thursday.

The first tranche is expected to total 500 billion yuan, with the remainder sold at an unspecified later date in two similar but separate batches, the China Business News reported, citing an unnamed source.

Stock market dealers said the report had impacted investor sentiment, with the Shanghai Composite tumbling 2.7 percent in morning trade on concerns of a liquidity crunch.

Separately, the special bonds will not be issued to the central bank for payment of the foreign exchange, the official Xinhua news agency said in a report late Wednesday.

The central bank will instead increase its treasury bond holdings, likely with the backing of another financial institution, Li Yang, a prominent national economist from the Chinese Academy of Social Sciences was cited as saying.

Proceeds from the bond sale will be allocated to the state forex investment agency, which is expected to be established in September, to manage part of the country's huge foreign exchange reserves.

China had amassed more than 1.2 trillion dollars in foreign exchange reserves by the end of March, some 70 percent of which is thought to be in US dollar-denominated assets, typically in relatively low-yielding Treasury bonds.

- AFP/ir