China Petroleum & Chemical Corp, Asia's largest refiner, is selling the world's biggest convertible bond issue of this year, raising money at a lower cost than by selling shares or plain debt.

The company, also known as Sinopec, is offering 23 billion yuan ($3.5 billion) of six-year notes that convert into equity if its shares rise 4.96 percent from their Shanghai closing price on Feb 17, according to data compiled by Bloomberg. The 0.5 percent interest rate for the first year is less than the 4.09 percent average yield Chinese government-linked companies pay for similar-maturity bonds, Bank of America Merrill Lynch indices show.

"It's low-cost funding compared to a bond," said Tan Weisi, who helps manage about 400 million yuan as head of Fortune SGAM Fund Management Co's fixed-income team in Shanghai. "If companies issue a corporate bonds the cost is high. Interest rates have been raised three times already."

Sinopec's sale shows borrowers are seeking funding alternatives after China raised rates for the third time since mid-October. As many as 20 companies may sell convertibles in 2011, according to Hong Yuan Securities Co, a unit of the nation's sovereign wealth fund.

While the benchmark 10-year government bond yields rose 0.15 percentage points this year, corporate bond sales had their best start on record last month as government efforts to curb inflation restricted access to loans and the stock market.

Sinopec's offering of equity-linked debt is the largest since Industrial & Commercial Bank of China Ltd, the world's biggest lender by market value, raised 25 billion yuan in August from notes that pay an initial 0.5 percent interest, Bloomberg data show. The securities may convert at a price of 4.15 yuan a share, and ICBC stock was half a percent lower at 4.21 yuan as of 1:14 pm in Shanghai. Sinopec shares fell 0.1 percent to 8.55 yuan in Shanghai as of 1:18 pm, down from a year-high of 12.15 yuan on March 29, after oil reached $100 a barrel in New York.

"Regulators are promoting the issuance of bonds and want more companies to issue corporate bonds and convertible bonds," said Fan Wei, a Beijing-based researcher in Hong Yuan's fixed-income department. "Sinopec will encourage more companies to issue convertible bonds," he said.

Chengdu-based Sichuan Chuantou Energy Co may be among the 20 companies that sell equity-linked debt in 2011, according to data compiled by Hong Yuan. Borrowers issued 27.4 billion yuan of equity-linked bonds this year, compared with 71.7 billion yuan in eight transactions in all of 2010.

Elsewhere in China's credit markets, five-year credit default swaps on Chinese government debt are 10 basis points higher this year on concern anti-inflation measures may threaten growth. The central bank raised reserve requirements for lenders on Feb 18 just 10 days after boosting interest rates. The contracts rose half a basis point to 77.5 basis points on Wednesday, CMA prices in New York show.