AS CHINA moves toward a more market-based approach to determining the cost of money in its economy, one metric suggests corporate debt is going in the opposite direction.

Some 17% of company bonds in the first half were sold at yields at least 50 basis points below rates in the secondary market, according to data from China Chengxin International Credit Rating Co. That’s a jump from 9.9% in the second half of 2018. Globally, only the most in-demand issuers can raise funds in line with where their existing debt is trading; almost everyone pays a premium.

Analysts interviewed by Bloomberg said the trend shows the distorted credit risk pricing as cash-strapped firms turn to opaque ways to raise funds. One phenomenon is related to a practice known as structured issuance, where companies subscribe to their own offerings to inflate demand. It’s storing up more mispriced debt in China’s financial system, cutting against efforts to foster markets where funding costs correspond with a company’s prospects.

“A big yield divergence suggests the coupon rate of the new bond does not reflect the fair market value it is supposed to indicate, nor the actual risk of the debt,” Yang Hao, a fixed-income analyst at Nanjing Securities Co., said in an interview.

Regulators have been seeking to curb structured sales. Pan Gongsheng, deputy governor of People’s Bank of China, said China should improve its credit rating and risk pricing mechanisms to make hidden debt issuance cost more explicit, according to a Caixin report on Aug. 9.

The yawning gap can be seen in China Wanda Group Co. In July, the tire maker sold a three-year note with a coupon at 6.8%, according to bond issuance document on the Shenzhen stock exchange. Its three-year bond due July 2021 traded at about 15.5% that same day, showing a yield gap of more than 800 basis points, Bloomberg-compiled prices show.

Oceanwide Holdings Co., which printed a note at 7.5% last month, saw its similar bonds trading at a yield higher than 20%. Officers responsible for securities information disclosure at China Wanda and Oceanwide Holdings declined to comment when contacted by Bloomberg.

Another contributor to the trend may have been secondary market distortions caused by the collapse of Baoshang Bank Co. The shock seizure sparked a wave of risk aversion as bond defaults in China hit a four-month high, marring refinancing prospects at weaker firms.

Secondary market bond yields of some of these companies jumped higher than their new issuance cost as investors cut their risk tolerance, said Mei Dongya, executive director at Shanghai Maodian Asset Management Co. “Some institutions were selling off bonds in need of cash after the bank seizure triggered a liquidity crunch,” Dongya said.

To be sure, structured debt issuance is just one method that troubled companies adopt to sell debt. “Many investors buying bonds not only pursue gains, but also out of some non-economic concerns,” said Shen Chen, a partner at Shanghai Maoliang Investment Management.

For Lu Lingge, an analyst at China Chengxin, such companies may find it hard to keep financing sustainable. “To fix the distortion not only needs a long-term debt pricing mechanism, but more importantly the information disclosure transparency”, she said, adding that it will improve market efficiency and boost pricing discovery. — Bloomberg