Beijing's new 60 billion yuan (about HK$56.23 billion) treasury bond issue, on sale from today, is another step in the gradual integration of its fragmented debt markets. In an unprecedented move, the tranche of seven-year state bonds will list on both the interbank debt market and the Shanghai and Shenzhen stock exchanges from December 16. Along with the recent opening of the interbank debt market to non-financial firms, the measure is likely to boost liquidity, narrow the yield gap between the interbank market and the stock exchanges and invigorate China's underdeveloped overall debt market, analysts said. With Beijing still billions of yuan away from meeting its 592.9 billion yuan debt issue target as the year draws to an end, the relaxation will also help it fund a record 309.8 billion yuan budget deficit. The experiment has proven a success with the 89 state bond underwriters: The 29.55 billion yuan in new treasury bonds up for grabs was nearly 22 times over-subscribed - a sharp contrast to the under-subscription of the previous three issues. In addition to the tender, the underwriters are obligated to subscribe to 50 million yuan of bonds each, with the rest sold to the public through banks. Analysts also said the high subscription rate was due to the issue's attractive fixed annual coupon rate of 2.93 per cent. In several previous bond issues, the Ministry of Finance's decision to let underwriters bid under flexible interest rates contributed to under-subscription. China set up the interbank bond market in 1997, having barred banks from trading on the stock exchanges for fear money was flowing illegally into stocks. Although the interbank market is much bigger in terms of total debt, liquidity and yields are lower than on the exchanges. By the end of September, 1.06 trillion yuan of treasury bonds and 725.8 billion yuan of financial bonds were listed on the interbank market, while 256.5 billion yuan of treasury bonds and 27.1 billion yuan of corporate bonds traded on the two stock exchanges. The People's Bank of China (PBOC) in October issued rules allowing the admission of non-financial firms to the interbank market, which was previously reserved for financial institutions such as banks, insurers and fund managers. But banks are still barred from trading bonds on the stock exchanges. Previously, state bond issues had been listed on either the interbank market or the stock exchanges. The segregation had contributed to low liquidity on the interbank debt market and a gap between major indicators on the two debt markets. The stock exchanges welcome greater integration of the two debt markets. State bond issues are a balancing act between Beijing's various interests. Improved liquidity can reduce Beijing's fund-raising costs but may further depress yields, which is a source of concern for the PBOC. At a time of record-low domestic interest rates, commercial banks held 50.2 per cent of China's outstanding treasury debt by May, 12.7 per cent up from the end of last year. The PBOC sees that as exposing them to interest rate and liquidity risks.