BEIJING China's new sovereign bonds will help bolster the economic recovery, China's vice finance minister Zhu Zhongming said on Wednesday, as the government's stepped-up fiscal stimulus sharply raises its budget deficit.

China's top parliament body has approved a 1 trillion yuan ($137 billion) in sovereign bond issuance to help rebuild areas hit by this year's floods and improve urban infrastructure to cope with future disasters, state media said on Tuesday.

"After the treasury bond funds are put into use, it will help drive domestic demand and further consolidate the recovery of the economy," Zhu said at a news conference.

The world's second-largest economy grew faster than expected in the third quarter, improving the chances that Beijing can meet its growth target of around 5% for 2023. But economists say the crisis-hit property sector remains a drag on the economy and continues to cloud the growth outlook.

In a rare move, China sharply lifted its 2023 budget deficit to around 3.8% of gross domestic product from an originally set 3% due to the rise in central government debt, according to state media.

The proposed increase in bond issuance comes as Beijing prepares to inject a fresh dose of fiscal stimulus to shore up the economic recovery, policy insiders say, but there are worries reverting to debt-funded stimulus would undermine the move to a consumer-led economic growth model.

Some analysts played down the near-term positive economic impact of the new debt issuance.

"We believe the economic impact of this 1 trillion yuan in additional CGBs (Chinese government bonds) should not be overstated, especially in the near term," Ting Lu, chief China economist at Nomura, said in a note.

"Fiscal multiplier effects from spending on water conservancy projects is likely to be rather limited."

China will reasonably set the pace of bond insurance and match the issuance with spending, Zhu said, adding that authorities will take steps to prevent bond fund misuses.

The government's debt level is still within a reasonable range, the minister said, without giving details.

Some policy advisers say the central government has room to spend more as its debt as a share of GDP is just 21%, far lower than 76% for local governments.

Half of the funds raised via the bond issuance will be spent this year and the other half will be used next year, according to state media said.

Analysts at UBS expect the government to raise its budget deficit and special local bond quotas for 2024, alongside further cuts in interest rates and bank reserve requirement ratios.

China's parliament has also approved a bill to allow local governments to front load part of 2024 local bond quotas.

Local governments had been told to complete the issuance of the 2023 quota of 3.8 trillion yuan in special local bonds by September to fund infrastructure projects.

($1 = 7.3098 Chinese yuan renminbi)

(Reporting by Ellen Zhang and Kevin Yao; Editing by Christopher Cushing & Shri Navaratnam)