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)