Smaller Banks Account for over Half of Tier-2 Capital Bond Issuance in 2021


Small and medium-sized banks in China have turned to the domestic debt market in order to shore up their tier-2 capital levels, after regulators have endeavoured to expand their access to new channels for funds.

As of 24 June a total of 32 banks had issued tier-2 capital bonds in 2021, raising 98.2 billion yuan. Small and medium-sized banks, including municipal commercial lenders and rural commercial lenders, accounted for 52.2 billion yuan in total, for a share of more than 53%.

This marks a sharp contrast compared to perpetual bonds – which are another key channel for Chinese banks to shore up their capital levels.

As of 24 June a total of 26 commercial banks in China had made perpetual bond issues in 2021 to collectively raise 298 billion yuan, with small and medium-sized banks accounting for just 36.5 billion yuan, or a mere 13%.

The big six state-owned banks have accounted for 261.5 billion yuan of funds raised by means of perpetual bond issues in 2021.

Industry observers point out that Chinese regulators have sought to expand capital access channels for smaller banks in recent years, especially in the wake of a shaky period for regional lenders which first kicked off with the forcible acquisition of Inner Mongolia’s beleaguered Baoshang Bank in May 2019.

These channels include special bonds, perpetual bonds and share convertible perpetual bonds, in addition to tier-2 capital bonds.

Tier-2 capital bonds in China usually have a term of 10 years, with the added condition that issuers have the right to redeem them in advance after the end of the fifth year.

Industry observers point tout however that an increasing number of smaller Chinese banks have opted not to redeem their tier-2 capital bonds, particularly after the near-collapse of Baoshang Bank made some investors jittery about the debt of smaller lenders.

On 15 June Xiangyang Rural Commercial Bank (襄阳农商行) announced that it would not exercise its redemption right over tier-2 capital bonds issued in 2016, while Xianning Rural Commercial Bank (咸宁农商) also refrained from redeeming 300 million yuan in tier-2 capital bonds in May.

“After the Baoshang Bank incident, the difficulty of bond financing by small and medium-sized banks increased, and prior to issuance they have needed to find investors, or they else have no means of completing issues,” said one source to Diyi Caijing.

“For financing purposes, some banks have completed issuance by means of the mutual holding of bonds issued by reciprocal subscribers.”