Caixin
Jan 26, 2021 08:25 PM
FINANCE

China Gives Small and Midsize Lenders New Tool to Replenish Capital

China is allowing the country’s small and midsize banks to use a new type of perpetual bond to raise money, as part of regulators’ efforts to help smaller banks replenish capital and keep risks under control.

The People’s Bank of China (PBOC) and the country’s banking watchdog have approved the issuance of perpetual bonds with an equity-conversion feature by two local banks — Zhejiang Chouzhou Commercial Bank Co. Ltd. and Ningbo Commerce Bank Co. Ltd. — the central bank said in a Monday announcement (link in Chinese).

On Wednesday, Ningbo Commerce Bank issued such a perpetual bond worth 500 million yuan ($77.2 million), the PBOC said. It has a 4.8% coupon rate. In China, the issuance was the first of a perpetual bond that offers investors an option to convert the debt into equity if a certain risk event is triggered.

Perpetual bonds issued previously, without the new contingency feature, will be subject to a write-down if a risk event occurs, the PBOC said.

The regulators’ move came as the country’s banks continue to ramp up borrowing to replenish capital. At the end of 2018, policymakers began encouraging banks to use perpetual bonds to replenish their capital and meet minimum required capital adequacy ratios, allowing the first issuance in January 2019. The tool has been under discussion for years, and was rolled out in 2019 as banks came under increasing funding pressure in response to regulations requiring them to move off-balance-sheet assets onto their books in an ongoing campaign against illicit “shadow banking.”

Perpetual bonds are a type of security that doesn’t come with a fixed maturity date. Issuers of such bonds can make interest payments to bondholders forever if needed or until they decide to repay the debt. The purpose of the bonds is to help banks meet capital requirements for absorbing losses.

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The PBOC noted these contingent convertible perpetual bonds, which have been broadly adopted internationally, could strengthen the protection of investors. It said that it will continue to encourage qualified small and midsize banks to issue the bonds to replenish capital, in a bid to better serve the real economy and enhance their capabilities to keep risks in check.

At the end of last year, China had about 1.2 trillion yuan in outstanding perpetual bonds, according to a report (link in Chinese) released earlier this month by Guosheng Securities Co. Ltd.

Nicholas Zhu, a vice president at Moody’s Investors Service, said in a Tuesday note that the latest approval of this new type of perpetual bond is “credit positive for Chinese banks, their depositors and senior unsecured creditors because it will widen the pool of potential investors in banks’ capital instruments, create another channel for banks to raise additional Tier 1 capital and strengthen their capacity to absorb losses.”

Guo Yingzhe contributed to this report.

Contact reporter Timmy Shen (hongmingshen@caixin.com) and editor Michael Bellart (michaelbellart@caixin.com)

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