Beijing Allows Use of Local Government Bonds to Shore up Capital Standing of Smaller Banks

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The Chinese central government has given the green light to the use of local government bonds to raise capital for beleaguered regional banks.

A regular meeting of the State Council convened by Premier Li Keqiang on 1 July gave its approval to the use of local government special bonds to “reasonably support” capital supplementation by small and medium-sized banks.

According to the State Council this capital support will focus in particular on strengthening the ability of small and medium-sized banks to provide their financial services to micro and small-enterprises, as well as supporting employment levels.

The State Council said it would also establish market-based maturation and timely withdrawal mechanisms for the use of special bonds for capital supplementation purposes, in order to prevent moral hazard.

The move comes amidst heightened concerns over the health of China’s regional lenders, following a spate of potential bank runs and failures since May 2019 starting with Inner Mongolia’s Baoshang Bank.

Concerns over the capital health of smaller regional lenders prompted China’s financial regulators to expand the range of funding tools available to them, starting with the launch of perpetual bonds in early 2019.

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