UPDATE 1-CNPC plans to issue China's first dollar bond

* CNPC to issue $1 bln in 3-yr dlr-denominated bonds soon

* Ample dollar liquidity, strong CNPC rating to boost demand

* Bond expected to pay about 60-70 bps over Libor

* Authorities seeking safe channels for domestic investors

* Would further open China's foreign-currency debt market (Rewrites with analysis)

By Bi Xiaowen and Karen Yeung

HONG KONG/SHANGHAI, April 20 (Reuters) - China National Petroleum Corp, China's biggest oil company, plans to issue the nation's first dollar-denominated bond by a non-financial institution in China's interbank market soon, several banking sources close to the deal told Reuters on Monday.

In April 2008, the central bank began allowing companies to issue medium-term debt, instead of limiting them to bills of up to one year, in order to broaden their financing options amid a slowing economy.

If CNPC sells the dollar-bond issue in the domestic interbank market, it would mark the launch of a foreign-currency debt market for non-financial companies in China, although Chinese firms have been issuing foreign currency bonds in overseas debt markets.

Analysts said the central bank's decision to start a domestic foreign-currency corporate debt market is aimed at providing a new investment channel to domestic investors who have become wary of buying foreign-currency bonds issued by foreign companies abroad amid the global economic crisis.

"The start of a new domestic foreign-currency debt market amid the global crisis suggests the authorities want to encourage banks to invest their dollars more safely, since domestic issuers have a more stable outlook in their credit ratings than foreign issuers do," said Liu Junyu, bond analyst at China Merchants Bank.

AMPLE LIQUIDITY, GOOD RATING

The state-run oil firm has started registering for dollar-denominated bill issuance of up to $3 billion with the National Association of Financial Market Institutional Investors (NAFMII) and plans to auction a $1 billion three-year floating-rate bond soon, the sources said.

"Once the registration process with the industry association has been completed, issuance in the interbank market will start very soon," said one of the sources.

An official at NAFMII, contacted by telephone, declined to confirm whether CNPC was planning such an issuance but said information related to all debt registrations would be posted on NAFMII's website.

Traders believe the floating-rate bond, if issued, would attract solid demand.

"Investors would be eager to buy the issue because of ample dollar liquidity and CNPC's good rating," said a trader at a mid-sized bank in Shanghai.

But the trader added that the coupon might come in about 60 to 70 basis points over London Interbank Offered Rates (LIBOR), above the 50 bps-over-LIBOR coupon paid on two-year dollar-denominated floating-rate bonds issued by China Development Bank at the end of 2008, reflecting CDB's policy bank status and its bond's shorter tenor.

CNPC said on Friday it had entered into a $5 billion financing deal with Kazakhstan's state oil company [ID:nPEK11166].

CNPC's listed subsidiary, PetroChina Co Ltd (601857.SS) (0857.HK), said in March it sought shareholder approval to issue up to 100 billion yuan ($4.6 billion) worth of bonds that could be denominated in yuan or in foreign currency. ($1 = 6.83 yuan) (Editing by Edmund Klamann)