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yuanSHANGHAI: China's southern city of Shenzhen auctioned 2.2 billion yuan ($345.5 million) in three- and five-years bonds on Friday, the last of four municipalities to sell bonds directly to investors in the first phase of a pilot scheme to make local government fund-raising more market-based.

Beijing hopes the scheme, which kicked off with a 7.1 billion yuan bond sale by Shanghai on Nov. 15, will lead to a proper municipal government debt market, and prevent the frenzied borrowing of recent years that has alarmed ratings agencies.

The Guangdong and Zhejiang provincial governments are the other local authorities taking part in the initial phase of the trial.

Shenzhen, a manufacturing boomtown, auctioned 1.1 billion yuan in three-year bonds at a yield of 3.03 percent, and 1.1 billion yuan in five-year bonds at 3.25 percent, traders said.

That compared with a yield of 3.01 percent for three-year bonds auctioned by the Zhejiang government, and 3.24 percent for similar five-year bonds this week.

Municipal and provincial governments in China have been unable under Chinese budget law to borrow directly, which has led to the creation of special financing vehicles through which they take out loans and sell bonds -- contributing to a mountain of local debt that the central government estimates at nearly 11 trillion yuan

Copyright Reuters, 2011