The bond business will be on trial first at the four biggest State-owned commercial banks and will be largely confined to the major cities of Beijing and Shanghai, sources said.

The move, mainly expected to integrate a divided bond market and boost trading, was anticipated shortly after Spring Festival in February but was postponed for "policy co-ordination reasons."

"The result of our discussions (about the timing of the launch) was early June," said an insider, referring to co-ordination sessions among the central bank, or the People's Bank of China, the Ministry of Finance and the four banks involved.

"It's rather certain this time as the central bank has approved it," he added.

The four banks - the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China (ICBC) and the Agricultural Bank of China - are scheduled to start taking account-opening applications in early June before the first OTC-enabled batch is issued in the interbank market a few days later.

The first issue, probably in tens of billions of yuan, will likely carry a seven-year term and a fixed interest, insiders said.

Analysts and bankers welcomed the move, saying it would help connect two sections - interbank and retail - of China's tripartite Treasury bond market and pave the way for eventual integration with the third - the stock exchange section.

"This is a breakthrough as it somewhat unifies the interbank market and the retail market," said Ma Junsheng, a senior manager with the ICBC.

Critics have long criticized the tripartite structure, under which the same product is traded at different prices while policy barriers prevent arbitrage from reunifying prices.

Bankers said OTC transactions, typically between banks and individuals, are expected to strengthen the banks' intermediary business, but cautioned against trading risks stemming from their role of "market-makers".

"The banks may face a fair amount of risk if big institutions take arbitrage," Ma said.

"But if we take the proper risk-prevention measures, we can still make a profit."

Insiders said if the trial proves a success, the reform may spread to more cities and be extended to include other products, including existing bonds.

Banks generally support placing the existing Treasury bonds, in which they have enormous holdings, into the OTC portfolio and are already studying the plan's workability.

"This is the trend, and technically not really difficult," another insider said.

(China Daily May 21, 2002)