Chinese Banks Plan to Issue $77 Billion of Perpetual Bonds

More Chinese banks plan to issue perpetual bonds to replenish capital after state-owned Bank of China became the first such issuer in January.

As of Tuesday, 10 major banks have disclosed plans to borrow by selling perpetual bonds, with total planned offerings of as much as 520 billion yuan ($77 billion).

The board of China Construction Bank, one of the big four state-owned banks, approved a plan to sell as much as 40 billion yuan of perpetual bonds, the bank said late Monday. Fuzhou-headquartered Industrial Bank also plans to issue as much as 30 billion yuan of such bonds.

Perpetual bonds are a type of security that doesn’t have a fixed maturity date and can make interest payments to investors forever if needed. Issuing them would be intended to address the challenge banks face in meeting their capital requirements for absorbing losses.

Many Chinese banks are running low on capital after a national deleveraging campaign required them to set aside greater amounts of capital to hedge off-balance sheet assets. At the same time, banks have tapped considerable capital in disposing of bad loans.

The capital shortage is particularly pressing for the big four state-owned banks, as the Financial Stability Board — an international body that makes recommendations for the global financial system ― requires them to meet a minimum loss-absorbing capacity requirement by 2025. To do so, the four banks need 2.85 trillion yuan ($423.4 billion) more capital than they have now, Moody’s Investors Service estimated.

In December, China’s cabinet-level Financial Stability and Development Committee said it was studying measures to help banks replenish capital, including borrowing via perpetual bonds, as soon as possible.

China’s central bank in January announced a new tool to encourage banks to replenish capital via perpetual bonds. The People’s Bank of China will set up a central bank bills swap (CBS), under which qualified banks can swap their perpetual bonds for central bank bills to improve the liquidity of the perpetual bonds.

Following the cabinet’s green light and the central bank’s supportive tool, Bank of China sold 40 billion yuan of perpetual bonds with a coupon of 4.5% Jan. 25. The issue attracted more than 140 institutional investors.

Among banks following the suit, Agriculture Bank of China, one of the big four lenders, plans the biggest borrowing. Its board approved a plan to sell as much as 120 billion yuan of perpetual bonds. Industrial and Commercial Bank of China, the biggest of the big four, plans to sell as much as 80 billion yuan of the bonds.

Other banks with similar plans include Bank of Communications, China Minsheng Bank, Huaxia Bank, Citic Bank International, China Everbright Bank and Ping An Bank.

Commercial banks will most likely invest funds from their asset management businesses in other banks’ perpetual bonds, said Sun Ting, a banking analyst at Haitong Securities.

Contact editor Han Wei (weihan@caixin.com)