PBOC to Provide Central Bank Bill Swaps to Shore up Perpetual Bond Liquidity

The Chinese central bank has launched a new instrument to help support liquidity for the issuance of perpetual bonds by the China’s commercial lenders.

On the evening of 24 January the People’s Bank of China (PBOC) announced its decision to launch Central Bank Bills Swaps (CBS), in order to “raise the liquidity of bank perpetual bonds (including non-fixed term capital bonds) and support the issuance of perpetual bonds to supplement capital by banks.”

Open market operations primary traders will be able to use perpetual bonds issued by qualified banks to obtain CBS from PBOC.

PBOC also announced that bank perpetual bonds with ratings of no less than “AA” will be accepted as qualified collateral for medium term lending facilities (MLF), targeted medium term lending facilities (TMLF) and standard lending facilities (SLF).

A senior PBOC official said that CBS operations would adopt fixed fee rate quantity tendering and public bidding with open market primary dealers.

The China Banking and insurance Regulatory Commission (CBIRC) also subsequently announced that insurers will be allowed to invest in the non-fixed maturity capital bonds of Chinese commercial banks.

Bank of China was the first lender to obtain approval for perpetual bonds, grabbing the green light for a 40 billion yuan issuance scheduled for 25 January.

“In order to guarantee the sustainability of financial support for the real economy, banks must have adequate capital,” said a PBOC official.

“Perpetual bonds are an important channel for banks to supplement tier-1 capital…CBS can increase the high-quality collateral of financial institutions that hold bank perpetual bonds, raising the liquidity of the bank perpetual bond market and strengthening the willingness of the market to subscribe for bank perpetual bonds, thus supporting the issuance of perpetual bonds by banks to supplement capital.”

The PBOC official that conditions for perpetual bonds to be used for CBS are:

  1. A capital adequacy ratio of no less than 8% at the end of the last quarter;
  2. A non-performing loan ratio of no more than 5% as of the end of the last quarter, with such loans defined as those overdue for more than 90 days.;
  3. No cumulative losses for the past three years;
  4. Assets of no less than 200 billion yuan as of the end of the last quarter.

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