BEIJING (Reuters) - China said on Monday that it will allow local governments to use proceeds from special bonds as capital for major investment projects, in a bid to support the slowing economy amid an escalating trade war with the United States.

Local governments should use special bonds for major projects including highways, gas and power supply and railways, Xinhua state news agency said, citing a cabinet document.

That would help “increase effective investment, improve economic structure, stabilize aggregate demand and maintain sustained and healthy economic development”, Xinhua said.

“On the basis of increasing the size of special bonds by a big margin, we should strengthen macro-policy coordination and maintain reasonable and sufficient market liquidity.”

Monetary policy should be appropriate to support special bond issuance and project financing, while financial institutions should ensure reasonable financing needs of major projects, Xinhua cited the cabinet as saying.

Financial institutions and individuals would be encouraged to invest in such bonds, it added.

“We believe these new measures could make it easier for projects to meet the requirement of the minimum capital ratio and allows firms to leverage more loans from banks (or issuing bonds),” Goldman Sachs wrote in a note.

“Typically, infrastructure projects are financed by both equity and debt, but they need to meet a minimum equity ratio requirement prior to leveraging up through borrowing.”

But local governments’ special bonds must be used to fund major projects that have certain returns on investment and local officials should strengthen risk controls for their special bond issuance and project management, Xinhua added.

Local governments must invest special bonds in real investment projects, instead of using them as the source of funds for government investment funds, industrial investment funds and other equity funds, it said.

“In the context of supporting infrastructure investment, this can be compared to the function of the special construction fund initiated in the third quarter of 2015, which supported projects through injecting capital into projects,” Goldman said.

Beijing has rolled off policy measures in recent months to support an economy pinched by a tit-for-tat tariff war with the United States. Economic growth slowed to a 28-year low of 6.6 percent in 2018 and further cooling is expected this year.