SHANGHAI, June 1 (Reuters) - A Chinese bond issued by a state-owned enterprise (SOE) was 1,000 times oversubscribed at the weekend, drawing bids worth 10 trillion yuan ($1.50 trillion), according to the Shanghai Stock Exchange, as investors scramble for safety in the virus-hit economy.

The flood of money chasing 10 billion yuan of 0.1% exchangeable bonds sold by hydro-power giant China Three Gorges Corp also reflects flush liquidity in China's financial markets.

Such fervour bodes well for local provinces' massive bond sale plans as the government rushes to fund stimulus due to the economic hit from lockdowns prompted by its zero-COVID policy.

Risk aversion is pushing money into bonds issued by SOEs and local government financing vehicles (LGFVs), while nudging investors away from private borrowers and the troubled real estate sector, said Brian Lou, head of investment, China, at AXA Investment Managers.

"It also shows the reality that the money is still there in the financial system ... investors still lack investable assets" as risk appetite is weak in a slowing economy, Lou said.

Jiangsu Dafeng Haigang Holding Ltd, an LGFV with perceived backing from the local government, raised 500 million yuan last week from investors who submitted bids worth nearly 30 billion yuan, or 60 times the bonds on offer. By contrast, a bond issued by the same company in March was barely over-subscribed.

With so much money chasing bonds, more than 100 bond funds started capping subscriptions in May to limit inflows.

BOND FEVER

The recent bond fever reflects plunging investor confidence following China's biggest coronavirus outbreak in two years. Although Shanghai came out of a two-month lockdown on Wednesday and the capital Beijing is also easing restrictions, investors remain wary.

China has eased monetary policy, but "liquidity is not flowing into the real economy, as demand remains weak," Guan Qingyou, chief economist of Ruiz Finance Institute, said in a social media webcast on Tuesday.

"A patient is released out of Intensive Care Unit after several months in bed - how can you expect him to go straight to Karaoke pubs? Recovery takes time," he said, referring to the slump in consumption during city-wide lockdowns.

The Three Gorges Corp's bond drew strong demand from institutional investors because the issuer is an AAA-rated central SOE, and the proceeds will be invested in hydro-power projects - green investments supported by Beijing, said AXA's Lou.

Moreover, the exchangeable bond may be converted into Shanghai-listed shares of China Yangtze Power Co at a fair price, adding to its appeal, he said.

Investors are also ploughing money into AAA-rated LGFV corporate bonds, nearly halving their yield premium over treasury bonds since the end of March. Yields fall when bond prices rise.

Signs of bond mania could be welcome news for Chinese provincial governments that are racing to issue some $225 billion of bonds in June, frontloading investment to revive the battered economy.

"Previously tight liquidity is getting loose, which means it's becoming easier for companies and local governments to raise money. That way, you can revive economic growth," said G. Bin Zhao, senior economist at PwC China. ($1 = 6.6715 Chinese yuan renminbi) (Reporting by Samuel Shen, Jason Xue and Andrew Galbraith; Editing by Sonali Desai)