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* China to expand 2020 budget deficit, raise spending -sources

* To spur infrastructure investment including 5G networks -sources

* China leaders consider plans to cut 2020 growth target -sources

* China economy expected to shrink for first time since 1976

BEIJING, March 19 (Reuters) - China is set to unleash trillions of yuan of fiscal stimulus to revive an economy expected to shrink for the first time in four decades amid the coronavirus pandemic, while a planned growth target is likely to be cut, according to four policy sources.

The ramped-up spending will aim to spur infrastructure investment, backed by as much as 2.8 trillion yuan ($394 billion) of local government special bonds, said the sources. The national budget deficit ratio could rise to record levels, they added.

Beijing is likely to have to lower its economic growth target for 2020 given the prolonged impact of the pandemic, according to the sources involved in internal policy discussions who declined to be named due to the sensitivity of the matter.

Chinese leaders are considering proposals from advisers to cut it to as low as 5% from the original target of around 6% agreed in December, they added.

The National Development and Reform Commission, the top state planner, the finance ministry and the central bank did not immediately respond to Reuters’ request for comment.

The measures come at a time when private-sector analysts are slashing their growth forecasts for China to lows not seen since the Cultural Revolution ended in 1976, with a sharp contraction expected in the first quarter.

China’s growth hit a near 30-year low of 6.1% in 2019, and the landscape has darkened significantly this year as the virus outbreak and strict containment have severely disrupted businesses.

“When the economy is suffering a big shock, it’s necessary to step up fiscal policy support given that monetary policy will have limited effectiveness,” a policy source said.

Higher spending could push the 2020 budget deficit ratio to as high as 3.5% - up from last year’s 2.8%, the sources said.

The government has long kept a 3% ceiling on the annual budget deficit ratio, which was last reached in 2017, and a level of 3.5% would be the highest on record, analysts said.

On Monday, National Bureau of Statistics spokesman Mao Shengyong said at a briefing that there was room for appropriately raising the annual budget deficit ratio.

The central bank could, meanwhile, cut banks’ reserve requirement ratios and interest rates further to help spur lending and lower funding costs for firms, the policy sources said.

China has already rolled out a raft of fiscal and monetary measures to provide credit and tax relief to companies, especially small businesses that have borne the brunt of the outbreak.

NEW INFRASTRUCTURE

Beijing is targeting infrastructure investment as a recovery in consumption could be slowed by rising job losses rise, while exports could be hit as the global economy reels from the pandemic, the policy sources said.

Local governments will be allowed to issue more special bonds, which could hit 2.5-2.8 trillion yuan this year, compared with 2.15 trillion yuan in 2019, the sources said.

The government aims to speed up the construction of planned key infrastructure projects as well as to launch some new projects for public health, emergency materials supply, 5G networks and data centres that have been endorsed by top leaders, the policy sources said.

“We need to find infrastructure projects that are vital to the economy, but it’s more difficult to find good projects than in 1998 and 2008,” said a second source, referring to the Asian financial crisis and global crisis.

Beijing faces constraints from rising debt levels and falling investment returns, following repeated stimulus efforts since the global financial crisis, when it unleashed a massive spending package.

GROWTH TARGET CUT LIKELY

Faced with limited room to stimulate its highly-leveraged economy, Chinese leaders may have to lower their planned growth target for 2020 due to the pandemic, the sources said.

Policy advisers are proposing a revised target of 5-5.5% or around 5%, from the planned target of around 6% that looks to be well beyond China’s reach.

This year could be crucial for President Xi Jinping’s ruling Communist Party to fulfil its goal of doubling gross domestic product (GDP) and incomes in the decade from 2010 to 2020.

A growth rate of about 5.6% this year would be enough for achieving those goals.

Any target revisions would be decided by top leaders ahead of the annual parliament meeting, which was originally scheduled for March 5 but was postponed due to the outbreak, the policy sources said.

China tentatively plans to hold its delayed parliamentary gathering in late April or early May, sources have previously told Reuters, as new coronavirus cases in the country drop sharply even as they surge elsewhere in the world.