Perpetual Bonds Will Help to Expand Capital Supplementation Channels: Chinese Central Bank

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A senior official from the Chinese central bank has highlighted the role that perpetual bonds will play in helping domestic lenders to shore up their capital standing.

The People’s Bank of China (PBOC) recently greenlighted the first domestic issuance of perpetual bonds by Bank of China, who sold 40 billion yuan of the instruments on 25 January.

At the same time PBOC announced the launch of central bank bill swaps (CBS) with the goal of bolstering the liquidity of perpetual bonds, as well as the acceptance of bank perpetual bonds with ratings of no lower than “AA” as qualified collateral for medium term lending facilities (MLF), targeted medium term lending facilities (TMLF) and standard lending facilities (SLF).

On 19 February Sun Guofeng (孙国峰), head of PBOC’s monetary policy department, pointed to the imminent launch of debut CBS operations, while also stating that the volume would “not possible be as large as imagined.”

Pan Gongsheng (潘功胜), deputy PBOC governor and head of China’s State Administration of Foreign Exchange (SAFE), said that bank perpetual bonds would both widen capital supplementation channels for banks as well as deepen and enrich the domestic bond market.

“Perpetual bonds are a comparatively mature capital supplementation instrument, and widely adopted internationally,” said Pan.

“During the period from 2016 to 2018, the global market saw the issuance in around USD$100 billion in perpetual bonds.

“In terms of the two main first-tier capital supplementation tools of preferred stock and perpetual bonds, commercial banks around the world have mainly chosen perpetual bonds.

“When it comes to capital supplementation by banks in China, preferred stock and second-tier capital bond issuance have already become normalised, but until now we have not had perpetual bonds.”

Pan highlighted the comparatively ample capital levels in the Chinese banking sector at present as a key consideration in pushing for perpetual bonds as a capital supplementation channel.

As of the end of September 2018 the capital adequacy ratio of China’s banking sector was 13.81%, while the core tier 1 capital adequacy ratio was 10.8%.

By the end of the year the core tier 1 capital adequacy ratio had risen to just over 11%.

Pan also highlighted the capital restraints faced by certain banks as well as tighter regulation and the return of many shadow banking assets to balance sheets as key factors behind the heightened need for capital supplementation channels amongst commercial lenders.

“From this perspective, launching perpetual bonds is of benefit to expanding the capital supplementation channels for the other tier 1 capital of commercial banks,” said Pan.

“At the same time nearly 80% of the capital structure of the Chinese banking sector is comprised of core tier 1 capital, and launching perpetual bonds is also of benefit to optimising the bank capital structure and strengthening the risk resistance of commercial banks and their ability to extend credit.”

Pan said another key consideration behind the launch of perpetual bonds is the Chinese bond market, which is currently the world’s third largest at 86 trillion yuan.

“The launch of commercial bank perpetual bonds is of benefit to enriching China’s bond market product structure and satisfying the asset allocation needs of long-term investors, as well as of benefit to improving the yield curve.”

Pan also highlighted the role of CBS in shoring up the liquidity of perpetual bonds.

“Central bank bill swaps are a form of bond swap transaction undertaken between the People’s Bank of China and primary dealers on the open market,” said Pan.

“Holders of bonds can engage in collateralised financing with central bank bills, as well as participate in certain monetary policy operations of the central bank and use them as collateral for monetary policy operations.

“The goal of this is to raise the market liquidity of perpetual bonds, strengthen the willingness of market entities to subscribe to bank perpetual bonds, and support the issuance of perpetual bonds by banks to supplement their capital.”

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