China urges active trading in government bonds as OTC market expands

SHANGHAI, April 29 (Reuters) - China's finance ministry on Monday urged qualified financial institutions to "actively participate" in government bond trading when the country expands its retail-focused OTC market next month, as Beijing prepares to ramp up treasury issuance.

All bonds issued by the central and local governments can be traded on the over-the-counter (OTC) market through bank outlets, the Ministry of Finance said in a statement.

China's central bank has said that starting on May 1, the OTC market will broaden the type of bonds eligible for trading. In addition, all interbank investors will be allowed to open accounts there, and foreign investors are also welcome.

"Chinese households are hungry for quality assets, and the government is planning to issue more bonds, so it's a good match," said Wang Hongfei, a bond investor.

He expects deposits to start flowing towards higher-yielding government bonds ahead of a ramp-up in government bond sales.

Chinese individuals sat on 146.4 trillion yuan ($20.21 trillion) worth of deposits as of the end of March as investors face a dearth of investment opportunities in a struggling economy.

The OTC market currently totals 766.4 billion yuan, a neglible amount in China's 158-trillion-yuan bond market, the world's second biggest.

Meanwhile, Beijing plans to issue 1 trillion yuan ($138.01 billion) in special ultra-long-term treasury bonds to support the economy.

Xia Haojie, bond analyst at Guosen Futures, said a liquid secondary bond market being promoted by authorities would also benefit local government financing.

"Currently, many local government bonds don't change hands after issuance. More active trading will whet investor appetite."

China's debt-laden local governments need to pay interest worth 1.18 trillion yuan every year, and every 10-basis-point drop in financing cost would reduce this burden by 40.7 billion yuan, Soochow Securities estimates.

The OTC market expansion also comes as China's central bank suggested that the bank's potential buying and selling of treasury bonds in the secondary market could be used for liquidity management and as a monetary policy tool.

"I think they are all part of a broader scheme," said a hedge fund manager who declined to be named.

"Treasury yield is the benchmark rate. But how can you be a benchmark if you don't have an actively-traded market?" ($1 = 7.2423 Chinese yuan renminbi) (Reporting by Shanghai newsroom Editing by Gareth Jones)