(Yicai Global) June 7 -- The scale of urban investment bonds issued by Chinese local government financing vehicles to fund infrastructure and public welfare projects plunged 54 percent last month from April due to greater regulatory supervision and changing market conditions. Rates also dropped to below 2 percent in some places.

Around CNY239.2 billion (USD35.9 billion) worth of urban investment bonds were issued in May, according to corporate data platform Wind. In the first five months, CNY2.18 trillion (USD327.1 billion) worth of the bonds were released, down 7 percent from a year ago.

Chinese regulators started to crack down on the issuance of local government bonds this year by raising the credit grading bar and restricting the use of the funds raised, the head of research at a private equity institution told Yicai Global. As a result, the issuance of such bonds slumped this year and is expected to fall further as the new classified management mode progresses.

A new credit grading list, not available to the public, has been brought in by regulators to classify and manage potential bond issuers, industry insiders told Yicai Global previously. High risk bond issuers will only be allowed to use the funds raised to repay existing debts. Those at low risk will be permitted to use the funds for projects or supplement liquidity.

Seasonal factors also had an impact. Disappointing earnings results and other influences may have contributed to the dramatic data fluctuation last month, Huaan Securities said. Just CNY14.9 billion (USD2.2 billion) was raised by local governments last month, plunging 90 percent from April.

Lending rates are also very low, falling to an average of 3.91 percent in May, with some local governments even dropping their rates to under 2 percent at month end, according to Wind. Interest rates have been low all year, with an average of 4 percent in January, 3.83 percent in February, 3.01 percent in March and 3.98 percent in April, all much lower than a year ago.

The low rates mean the urban investment bonds are still sought after despite fund congestion in the financial markets caused by insufficient real economy needs, market insiders said.

Bond issuance should start to pick up after June and increase in the second half as measures to stabilize the economy take effect, Liu Zhiyi, vice president at Jurong AMC, told Yicai Global. Infrastructure investment is one of the main forces to stabilize economic growth, which is why these bonds are favored, he added.

Editors: Xu Wei, Kim Taylor