The credit market is “overheating,” according to nineteen of 21 respondents in a survey of onshore analysts, traders and fund managers. Chinese companies sold a record 3.5 trillion yuan($550 billion) of notes this quarter, up 90 percent from the same period last year, as borrowing costs plunged to six-year lows. Risks of a bubble have emerged, according to Industrial Securities Co. and Huachuang Securities Co.

China faces a dilemma as it seeks to trim the world’s biggest corporate borrowings while preventing sharper economic slowdown. The People’s Bank of China has cut interest rates and is grappling with the fallout of what Governor Zhou Xiaochuan called a “burst” equities bubble. The extra yield on five-year AAA company securities over government notes dropped to a six- year low of 83.6 basis points earlier this month, even as the nation’s credit-default swaps surged to a two-year high.

"We should stay alert for a jump in corporate yield premiums caused by an explosion of credit risks," said Wang Shen, head of fixed income research at Bosera Asset Management Co., which oversees 302.8 billion yuan of assets. "The current corporate bond yield premium doesn’t reflect the real credit risks in China."

A Shimao Property Holdings Ltd. unit issued 6 billion yuan of five-year notes onshore this month with a 3.9 percent coupon. Its $1.1 billion of seven-year dollar bonds sold in February and rated junk by Standard & Poor’s are trading at a yield of about 7.5 percent.

Gas distributer Oriental Energy Co., which Bloomberg- compiled data show has debt-to-equity of 309.3 percent and total obligations three times its cash, issued 550 million yuan of 2020 notes in September at 5.78 percent.

Some 60 percent of those surveyed forecast corporate bond yield premiums will widen in the fourth quarter.

“The stock rout has driven a lot of capital into the bond market,” said Shi Lei, the head of fixed income research in Beijing at Ping An Securities Co., a unit of China’s second- biggest insurance company. “Even though there’s no such sign at the moment, I’m concerned what will happen if there is a shift in central bank monetary policy or a rebound in stocks.

Cheaper money is also a lure for bond buyers. “Most investors borrow three to 10 times their original investments to boost returns,” meaning any fallout later could be worse, according to Ping An’s Shi.

China Vanke Co., the nation’s third-biggest developer, sold five-year AAA rated bonds on Thursday at 3.5 percent, a lower yield than notes issued by China Development Bank Corp., the biggest of the three policy banks that have quasi-sovereign ratings.

“Chinese companies’ credit profiles are still worsening,” said Jiang Chao, a bond analyst at Haitong Securities Co. in a report Friday.

Money Exits

China has already had three domestic bond defaults this year including Baoding Tianwei Group Co., a maker of electrical transformers that reneged on payments in April, becoming the first state-owned company to default. It said earlier this month it’s filing for bankruptcy or restructuring.

Huachuang Securities said in a report on Sept. 22 that bubbles are piling up in the corporate note market because many banks’ wealth management product accounts have to use leverage to increase returns. Industrial Securities also warned in a report e-mailed Sept. 23 that the flow into domestic securities could pose the risk of a bubble. Corporate insolvencies in China will jump 25 percent this year and 20 percent in 2016, according to a report this month by Euler Hermes SA.

Money is leaving China faster than ever following the central bank’s yuan devaluation in August, according to a Bloomberg gauge tracking capital flows. An estimated $141.66 billion exited China in August, exceeding the previous record of $124.62 billion in July, data compiled by Bloomberg show.

“Risks on corporate bonds may arise if inflation grows faster than expected and there are more capital outflows driven by yuan weakening,” Zhou Hao, a senior economist in Singapore at Commerzbank AG, said.