Caixin
Jan 28, 2019 08:47 PM
OPINION

Caixin View: Banks’ New Fundraising Tool Won’t Help Cash-Starved Firms

* Get ready for a deluge of perpetual bonds issuances as banks use the new debt instrument to strengthen their balance sheets

* But don’t expect banks to squander their new-found lending resources on the private sector – the old obstacles to lending are still very much in place

China’s banks are stuck between a rock and a hard place. Amid an ongoing crackdown on financial risks, they’ve been forced to bring shadowy off-balance sheet debts back onto their books. And, as China’s economic growth slows, they’re also under huge regulatory pressure to lend more to credit-starved parts of the real economy, particularly small and privately owned firms. These factors are putting pressure on banks’ capital adequacy ratios (CARs) — a measure of how well banks can absorb losses and that is calculated by comparing the amount of capital they hold with their risk-weighted assets. Riskier loans to small companies require more capital to be held and thus put extra pressure on CARs — this was a major reason for banks’ reliance on off-balance sheet financing in the first place. But partly because of the pressure to boost this type of lending, banks have to raise extra capital to strengthen their balance sheets in order to have the ability to make the extra provisioning required on higher-risk lending.

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