Beijing: Bonds of China's Ministry of Railways, the nation's biggest issuer of corporate debt, are heading for their longest losing streak since 2008 as it struggles to sell notes amid a record cash crunch.

The Beijing-based railroad sold 18.7 billion yuan (Dh10.53 billion) of the 20 billion yuan of one-year commercial paper it offered on July 21, which was "probably" its first such failure, according to Guotai Junan Securities Co. Its bonds have fallen 0.79 per cent in July, poised for a third straight monthly loss, as global railway debt rallied, according to Bank of America Merrill Lynch indexes.

Demand for its bonds is being sapped as the central bank drains cash from the financial system to damp the fastest inflation in three years. The railway builder has been forced to slow construction of its high-speed network, three weeks after opening the 1,318km Beijing to Shanghai line, and faces a two-month safety inspection after at least 36 people were killed in a bullet-train crash two days ago.

Largest network

"Many banks, which are big buyers of the railway bonds, have already hit the limit on the amount of loans they can extend and the bonds they can purchase from the ministry," said Shi Lei, head of fixed-income research in Beijing at Ping An Securities Co, a unit of China's second-biggest insurance company. "Lenders are all hoarding cash amid tight liquidity."

The rail operator, which is spending 2.8 trillion yuan constructing the world's largest high-speed network, issued the notes at 5.18 per cent, according to a statement on Chinabond, the nation's biggest debt clearing house. The yield at the sale was 1.43 percentage points higher than the previous day's closing level of 3.75 per cent for one-year government debt, Chinabond data show.

About 192 people were injured in the collision near the eastern city of Wenzhou, in which a broken-down train was rear-ended by another locomotive. The rush for Asia's biggest economy to build the network in less than five years may be behind the crash, according to Zhao Jian, a professor of economics at Beijing Jiaotong University and long-time critic of China's high-speed rail projects, who spoke in a telephone interview on Sunday.

Higher borrowing costs are increasing the risk of corporate default. The difference in yield between China's top-rated benchmark three-year corporate bonds and similar-maturity government debt widened six basis points this month to 154.5 basis points on July 22. It reached 157 basis points on July 15, the highest since December 2009.

The cost of insuring government debt from default fell 5 basis points last week to 86 basis points, according to data provider CMA, which is owned by CME Group Inc and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

The state rail operator received 428.9 billion yuan in bank loans under a two-year, 4-trillion yuan stimulus package aimed at buffering the nation during the financial crisis after the 2008 collapse of Lehman Brothers Holdings Inc.

The rail ministry last sold 366-day paper at a yield of 4.35 per cent on June 9. Calls and a fax to the ministry's press office for comment on the sale weren't answered.

The three-month Shanghai Interbank Offered Rate surged a record 179 basis points last month and touched an all-time high of 6.46 per cent on June 28. It fell five basis points last week to 5.97 per cent. The seven-day repurchase rate, a measure of fund availability, gained 127 basis points to 5.41 per cent last week, according to the National Interbank Funding Centre. It fell 18 basis points to 5.23 per cent yesterday.

Spending

Yields on the government's 10-year bonds rose 14 basis points, or 0.14 percentage point, to 4.07 per cent last week, Chinabond data show. The government has reined in spending and the People's Bank of China has raised interest rates five times since October 20 to cool the economy. Consumer prices climbed 6.4 per cent in June from a year earlier, after increasing 5.5 per cent the previous month.

The finance ministry also sold less debt than planned at sales of three-year and 182-day notes this month. Failures by the railway ministry, underwritten by banks, are rare, said Huang Jiliang, a bond analyst in Shanghai at Guotai Junan Securities, the nation's biggest brokerage by revenue.

"It's probably the first failure for railway bonds in history," Huang said. "It's not a good time to sell bonds because everyone is short of money."