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* Central Huijin poised to support flagging bond market
* Bond prices have fallen sharply in recent weeks
* Huijin may buy bonds from state-owned financial firms
* Banks are selling subordinate debt to boost capital adequacy
SHANGHAI, Dec 10 (Reuters) - Central Huijin Investment Ltd., the state-owned holding company for China's largest financial institutions, has gained approval to trade bonds in the interbank market, paving the way for the government to support the flagging market.
Chinese bond prices have fallen sharply in recent weeks, amid tight liquidity in the domestic money market and expectations that reforms to deregulate interest rates will push rates higher. Bond prices fall when interest rates rise.
A notice on Central Huijin's approval to trade bonds was published Monday afternoon. On Tuesday morning, bond yields extended their rising trend.
Central Huijin, a unit of the country's sovereign wealth fund, China Investment Corporation, has periodically purchased listed shares of commercial banks and other financial firms on the secondary market to boost confidence during periods of market weakness.
The approval will enable the government to do the same for bonds issued by banks such as Industrial and Commercial Bank of China and insurers like New China Life Insurance .
At least 12 Chinese listed banks have already announced plans to raise about 425 billion yuan ($70 billion), as they strive to meet tough new capital adequacy requirements that took effect this year in line with global rules known as Basel III.
The fundraising will occur largely through subordinate bond issues. The new capital rules from the China Banking Regulatory Commission allow subordinate debt to count as regulatory capital for the first time.
The approval for Huijin came from the National Interbank Funding Center, an industry body backed by the central bank that regulates China's interbank.
The approval came in response to an application from the People's Bank of China's Shanghai branch, according to the announcement posted on the center's website, www.chinamoney.com.
$1 = 6.0723 Chinese yuan Reporting by Gabriel Wildau; Editing by Richard Borsuk