But bankers said they were not surprised by the bleak turnover and that much can still be done to improve the situation.

The first 46 billion yuan (US$5.5 billion) tranche of OTC-enabled Treasury bonds was issued earlier this month in a major reform drive. However, a thin 2 per cent annual interest rate has embarrassed banks authorized for OTC trading and they sold a meagre 4.4 per cent of their holdings in a week-long issue period.

As a result, trading interest was slugghish on the first trading day of the seven-year bonds yesterday. Investors, including individuals and non-financial institutions, preferred other existing shorter-term bonds that carry higher yields.

Ma Junsheng, a securities manager with the Industrial and Commercial Bank of China, said yesterday: "Trading has been fairly sluggish today.

"But it's just normal and it's well within what we had expected."

Policymakers had deliberately opted for a relatively long seven-year term for the first OTC issue to avoid overselling, which could have disrupted the normal functioning of the new market.

The four State-owned commercial banks - designated to take part in the trial OTC trading - work as market makers and are obliged to buy all that investors have to sell and they must sell all their holdings as long as there is demand.

In the one-week issue period, the ICBC sold more than 700 million yuan (US$84 million) of OTC bonds or some 10 per cent of its total holdings, which was a relatively good performance compared to the other three banks, Ma said.

Insiders said the People's Bank of China was rather satisfied with the level of market interest as "colder is better than too hot" in the sense that situations where the central bank had needed to step in had been avoided.

But the weak investor reaction did catch some banks off guard. Some banks had hoped to profit on an anticipated shortage and so put in huge low-interest-rate bids during the inter-bank issue period to force down the winning interest rate.

Bankers said it was a bit too early to worry as they had not yet used pricing strategies to boost trading and that such tradable OTC bonds remained a good choice for businesses with idle funds given the low interest rates on savings accounts.

Ma said: "We just got to work harder to let more people know the benefits (of the OTC bonds)."

Next month will see the issue of treasury savings bonds, an untradable type of bond that is still popular among investors due to the higher yields. An insider said the bonds were likely to carry a lower interest rate in the hope of shifting more investor attention to the tradable of OTC bonds.

A plethora of liquidity on the inter-bank bond market - which has increasingly high rate of interactivity with the OTC market - is widely attributed to the OTC issue's low interest rate as underwriters compete by placing low-yield bids.

(China Daily June 18, 2002)