The Ministry of Finance is back-pedalling on reforms of Treasury bond issues this year by deciding to set the interest rates for the bulk of the remaining tranches and having banks underwrite them. Treasury bond traders said the ministry had indicated it would fix the interest rates of two of the three remaining tranches of bonds to be issued this year through the banks, instead of having them decided through auctions. The two tranches are worth 40 billion yuan (about HK$37.28 billion) each. The issuing method for the last tranche of 25 billion yuan has yet to be decided. Including the present issue of 123 billion yuan, the size of government debt papers with interest rates fixed by the ministry and sold through banks will be worth 203 billion yuan - or 82 per cent of this year's total quota of 248.5 billion yuan. This reverses a market-oriented experiment carried out extensively last year, where the interest rates were set by banks and brokerages through competitive bidding and where the debt papers were sold primarily through the stock exchanges' electronic networks. Shanghai Finance Securities' assistant bond manager Liu Haihao said: 'There is definitely a big change in this year's issuing process as the lion's share of the bonds are going to be sold through banks and issue yields fixed by the ministry.' Analysts said the reversion to quasi-administrative means was triggered by the ministry's concern about the high cost of bond issues through bidding and fear that this year's bumper issue may not be popular with buyers. The first sale of government debt papers for the year did not sell well with the investing public, despite the relatively high issue yield of 10.68 per cent. The interest rate, fixed through an auction, was higher than the 7.92 per cent paid on savings deposits of a similar maturity. At the end of the issue period, however, the tranche was barely subscribed. Analysts said if competitive bidding was used again for the remaining tranches this year the interest rates would remain high, which would raise the ministry's cost of bond sales. Shanghai Newland Securities bond analyst Lu Weiming said: 'If the ministry continues with the auction method, issue yields are likely to be high, because yields in the secondary markets are strong.' By fixing the interest rates lower than those of previous issues but slightly higher than the levels paid on savings deposits and selling the debt papers through the extensive networks of the state banks, the ministry may be assured of good response from retail investors. That is why the second tranche of bonds this year - the 123 billion yuan worth of certificate bonds - is being sold through the Bank of China, Industrial and Commercial Bank of China, Agricultural Bank of China and China Construction Bank. The sale ends on October 20. Shenyin & Wanguo bond trader Chen Yong said: 'If they don't sell well with the public, the banks, flush with cash, can absorb the issue.'