China introduces new rules on corporate bill issuance - sources

* All issues of commercial paper over 3 mln yuan to be electronic by 2017 - sources

* Follows report of alleged bill of exchange scam at major state bank

* By 2018 China plans 80 pct of commercial paper to be electronic - sources

BEIJING/SHANGHAI, April 1 (Reuters) - China’s central bank is introducing new rules to the country’s corporate bills market requiring banks to shift to electronic forms of issuance, sources with direct knowledge of the matter told Reuters, a move that follows a recent case of fraud in the sector.

The directive comes from the People’s Bank of China’s (PBOC) payment and settlement department and requires corporate bill issues with a face value of more than 3 million yuan ($464,065) to be executed electronically as of next year, two sources told Reuters.

The upgrade comes after recent reports of bill fraud at Agricultural Bank of China Ltd., which domestic media allege originated as a scam by two of the bank’s employees.

China’s commercial paper market is highly fragmented, with transactions conducted mainly through dozens of regional centres.

The absence of a centralised system has meant poor liquidity and limited trading participation, which is mostly conducted by the People’s Bank of China, commercial banks, industrial companies and businesses that focus solely on discounting and rediscounting.

Converting bills into an electronic format could help reduce the risk of forgery and other forms of manipulation, and also make secondary transactions easier to monitor.

Neither the central bank nor Agricultural Bank of China immediately commented when contacted by Reuters.

The sources said the minimum issue size requiring electronic execution would be lowered to 1 million yuan from 2018. By the end of 2018, at least 80 percent of all commercial paper business at each financial institution must be completed electronically, the sources said.

A source at a regional branch of the PBOC told Reuters bills with face values of more than 3 million and 1 million yuan make up a relatively small share of the market at present.

Central bank vice governor Pan Gongsheng said the bank was working on a plan to centralise the commercial paper market through an electronic system, Shanghai Securities News reported in early March.

In 2015, Chinese banks and other corporates issued a combined 22.4 trillion yuan ($3.45 trillion) in commercial bills, up 1.3 percent from the previous year, according the central bank’s fourth-quarter monetary policy report.

Orient Securities bank industry analyst Wang Jian said a large proportion of commercial paper business is still done manually and offline, which currently makes risk-mitigation difficult.

Commercial paper, sometimes known as corporate bills in China, refers to short-term obligations with maturities typically up to 270 days and issued by banks, corporations and other borrowers to investors with temporarily idle cash. ($1 = 6.4646 Chinese yuan) (Reporting by Clark Li, Li Zheng and Pete Sweeney; Editing by Sam Holmes)