When the mainland stock market began crashing from its peak in October last year, companies hankering for cash were hoping against hope for another financial lifeline. But the government's monetary tightening soon dashed those hopes as banks subject to lending quotas put up the loan shutters. The situation is expected to become worse for many companies, exacerbating an economic washout across the country. Nonetheless, there is some glimmer of optimism in a previously undeveloped area of the mainland financial market - corporate bonds. They are now seen as a possible funding alternative as Beijing pushes forward the development of a multi-layer debt market for cash-strapped companies. On the Shanghai Stock Exchange, where national industrial behemoths such as PetroChina and China Shenhua Energy drew trillions of yuan from initial public offerings last year, not one company has been able to launch an initial share sale since August. Yet, non-financial companies raised 261.6 billion yuan (HK$296.6 billion) from bond sales in the first three quarters of this year, a 144.3 per cent jump from a year ago, according to China Foreign Exchange Trade System data. 'The bond market grew by leaps and bounds this year,' said Gu Weiyong, chief investment officer at Ucon Investment Management. 'That was a result of government directives and increasing interest in fixed-income products amid the equity rout.' The buoyant bond market has been a boon to the mainland's biggest companies, which had launched multibillion-yuan share offers during the stock market boom. In the first nine months, companies netted a total of 287.6 billion yuan from the equity market. But the securities regulator has frozen initial share sales since September, and the ban might not be lifted until the end of this year, sources said. On the mainland, companies can sell bonds on the interbank market and the stock exchanges. The National Reform and Development Commission and the People's Bank of China approve debt sales on the interbank market, while the China Securities Regulatory Commission is responsible for approving bond issuance by listed firms on the stock exchanges. Industry sources said the power struggle among various authorities has crimped Beijing's effort to liberalise the market. Last year, Beijing halted approvals for medium-term bills as different state-level agencies bickered over how the bond market should develop. However, the gradual downturn in growth, translating into lower corporate earnings, struck fear among economic policymakers, who restarted the approval procedure in April, allowing nearly a dozen state giants, such as China Telecom Corp and China National Nuclear Corp, to issue medium-term bills. The move was hailed by bond market observers as a groundbreaking policy to create an alternative form of corporate financing. Beijing is also considering a plan to let small and medium-sized firms issue short-term, high-yield bonds on the interbank market. Only large, profitable companies can currently gain access easily to the bond market. With the global economy in the doldrums, analysts predicted the downward spiral of the stock market would continue in the coming quarters, after a fall of nearly 70 per cent from last year's peak. Despite the central government's U-turn on monetary policy, which has seen it cut interest rates four times since September, banks were cautious about increasing non-performing loans and would slow down the expansion of lending, analysts said. Aware of the trend, Beijing is taking bolder steps to liberalise the bond market and widen companies' access to money. The NDRC said early last month it would streamline the approval procedure and expand the scale of the corporate bond market. Companies that meet the regulatory requirements, such as capital and profitability levels, could issue bonds without going through a cumbersome approval process, the planning agency said. It approved bond issues worth 180 billion yuan in the first 10 months, 170.9 billion yuan more than for all of last year. With its higher profile, the bond market has attracted an influx of capital that has raised prices and lowered yields. The index tracking interbank market bonds rose 7 per cent between January and September. Anticipation of further interest rate cuts has added lustre to the fixed-income products. Everbright Securities bond analyst Li Huaiding predicted the People's Bank of China would cut interest rates five times more to stoke economic expansion. 'In tandem with the slowdown of exports, investment and consumption - the three major growth engines - the bond market has more opportunities than risks,' Mr Li said in a report. Bond-focused mutual funds are already beneficiaries of the monetary easing. In October, mainland bond funds posted a 2.09 per cent gain, compared with a loss of 22.2 per cent by equity-based funds. Earlier this year, hot demand for a bond fund offered by China Asset Management signalled a sea change in sentiment in the mainland capital market. Analysts estimated at least 100 billion yuan worth of cash flew from stocks to bonds as investors started to chase safer returns. Mutual funds have also increased buying of bonds in the past months, shunning the roller-coaster ride on the stock market. At the end of October, mutual funds held treasury and corporate bonds worth 1.13 trillion yuan, almost four times the 300 billion yuan held at the end of last year. But analysts said there was a catch. Beijing is set to launch a massive amount of government bonds next year to fund its 4 trillion yuan stimulus package. The central government will only contribute 1.2 trillion yuan to the package, while the remainder will be raised from bond sales, bank loans and public investors. Beijing's debt sales would compete for funds originally slated for corporate debt, analysts said. The recent 59 billion yuan bond sale by the State Development Bank, a policy bank, already points to the dwindling availability of cash among investors. The issue drew only 27 billion yuan in subscriptions. However, Mr Gu said: 'The supply of funds isn't a big concern. The primary concern is that the aggressive monetary easing will finally lead to stubborn inflation in the coming two or three years. Inflation will largely dent buying interest in bonds.' Overall, analysts said the mainland bond market has a large, untapped potential, although Beijing remains wary of risks in developing the junk bond sector. Banking and insurance regulators limit the investment of institutions in issuers with low credit ratings. Insurers can buy corporate bonds, but they are not allowed to purchase those without capital guarantees. 'It is difficult to find a guarantor, since no one would like to take risks, particularly for small-scale companies without a huge capital base,' said Gang Meng, a bond rating director at Dagong Global Credit Rating. 'Real estate developers are still suffering from the credit crunch, since their ratings are normally low and they can't find powerful companies as guarantors.' There are other hurdles for the nascent bond market. The US credit crisis has weighed on mainland financial regulators, whose focus is still on risk control rather than innovation. More importantly, the lack of an efficient co-ordination mechanism has deterred Beijing from taking a substantial step to further liberalise the bond market. The banking and insurance watchdogs are reluctant to push reform too far in bond trading, as priority is given to safety of capital. In November last year, the central bank allowed trading of interest rate forwards to let market forces determine capital costs, a sign that the authorities would introduce more derivatives to spur the growth of the money market. In March, Ouyang Zehua, a deputy director with the CSRC, called on banking and insurance regulators to loosen their grip and allow institutions to buy bonds freely. Beijing was planning to liberalise the money market in line with the country's increasing industrial and financial might. But as the global financial turmoil unfolded, the government has dragged its feet on market reforms. 'Derivative products are important, because they are basically designed to hedge risks,' said Mr Gu. 'For China, derivatives are needed, but they should be properly utilised.'