BEIJING Automotive Group Co, which makes Mercedes-Benz cars in China, sold its biggest bond ever as falling sales in the world's largest auto market make banks reluctant to lend to the industry.

The state-owned company sold 1.6 billion yuan (US$250 million) of seven-year bonds that yield 4.49 percent, according to a company statement last Wednesday. It offered five-year securities last year at 5.26 percent. Globally, the average yield on notes of the biggest carmakers is 2.05 percent, according to Bank of America Merrill Lynch indexes.

China's vehicle sales fell 14 percent to 1.58 million units last month from a March peak, as the slowest economic growth in three years and caps on car registrations led to a glut at dealerships. Carmakers are turning to the debt market as competition for bank lending mounts. New loans may be as low as 7.3 trillion yuan in 2012, short of the government's target of as much as 8.5 trillion yuan, according to an estimate by Mizuho Securities Asia this month.

"Beijing Auto has to turn to bond sales as automakers gear up to get through the difficulties caused by rising competition and falling sales," said Zhang Xin, a Beijing-based analyst with Guotai Junan Securities Co. "Too many companies want to borrow from banks and banks don't have enough money to lend to every single one."

Bond boom

Beijing Automotive tapped the debt market because borrowing costs there "are lower than bank loans and selling bonds can help lower costs," Hu Enping, a company spokesman, said in an e-mailed response to questions.

Top-rated Chinese companies pay an average 4.88 percent for 10-year debt, 30 basis points less than at the beginning of the year, according to Chinabond data.

Yields on the benchmark 10-year government bond have fallen 14 basis points this year to 3.28 percent. That compares with the 6 percent benchmark 12-month lending rate set by the central bank.

BYD Co, the Chinese automaker backed by US billionaire Warren Buffett, has also turned to the domestic fixed-income market this year. It sold 3 billion yuan of five-year securities priced at 5.25 percent in June.

Chery Automobile Co, China's biggest closely held automaker and maker of the QQ, sold 1 billion yuan of one-year bonds in January priced at 6.95 percent.

Auto Slump

Carmakers are selling bonds as the government offers no details on any steps to prop up the industry on the scale of the stimulus plan of 2009. The National Development and Reform Commission is still studying whether measures to subsidize vehicle purchases in rural areas are "even needed," Chen Jianguo, deputy director of the agency's industry coordination department, said in the northeast city of Dalian on June 25.

"The auto market is not doing great at the moment and it is more difficult for automakers to borrow from banks," said Feng Liang, a Beijing-based analyst at Guodu Securities Co. "They have to turn to the bond market for money. As a local government-owned company, Beijing Auto has a problem finding buyers of their bonds."

Beijing Auto, which is owned by the capital city's government, is rated AAA by Dagong Global Credit Rating Co, according to its prospectus.

Auto sales in the world's second-biggest economy rose 2.93 percent in the first half of 2012, the slowest pace in 14 years, according to the China Association of Automobile Manufacturers.

Long-term prospects

Adding to pressure on manufacturers, major Chinese cities are increasingly using quotas to curb vehicle emissions and ease traffic congestion. The southern city of Guangzhou capped the number of new vehicle registrations at about half of last year's total and suspended new registrations for July. The move follows similar restrictions in Beijing and Shanghai.

"In the short-term, because of the impact of the regional restrictions, car sales will definitely slow down," said Fan Wei, a fixed-income analyst at Hongyuan Securities Co in Beijing. "But if you consider China's long-term economic development, Chinese citizens buying volumes will increase dramatically, so I'm positive on the industry's long-term prospects."

The cooling economy has exacerbated the recent slump in demand for vehicles. China's gross domestic product expanded 7.6 percent in the second quarter from a year earlier, the slowest pace in three years.

Five-year credit-default swaps insuring China's sovereign debt against non-payment were unchanged at 123 on July 24, according to data provider CMA, which is owned by McGraw-Hill Cos and compiles prices quoted by dealers in the privately negotiated market. The swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to debt agreements.

Average inventory carried at Chinese showrooms exceeded two months of sales by the end of May, compared with more than 45 days at the end of April, Luo Lei, deputy secretary general of the state-backed China Automobile Dealers Association, said on June 6. The glut at the dealerships, which is leading to price cuts, is unsustainable, he said.

'Limited channels'

Sales of Beijing Auto, the country's fifth-largest vehicle manufacturer, rose 0.4 percent in the first half, lagging the industry average. Beijing Auto's venture with Daimler AG sold a total of 36,013 units of cars in the first half, less than a third of its annual target, according to the China Association of Automobile Manufacturers.

Average retail vehicle prices fell 1.2 percent in June from a year earlier, with those for passenger vehicles dropping 1.9 percent, said Cheng Xiaodong, head of a unit that monitors auto prices at the National Development and Reform Commission. In May, passenger-vehicle prices slumped the most in about two years because of overstocking.

Beijing Auto's debt to asset ratio was 64 percent at the end of 2011, according to its prospectus. It will use the money from its bond sale to invest in a 4 billion yuan engine and transmission manufacturing base and to pay back bank loans and replenish working capital, it said.

"There are limited channels to raise funds," Guotai Junan's Zhang said. "Automakers don't really have a choice but to go to the bond market, and they are straining their capital chains."