Smaller Chinese Banks Get Official Backing for Capital Boosts to Better Support Real Economy

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Chinese regulators are providing greater support to smaller banks seeking to raise funds to improve their capital standing, as part of efforts to increase the supply of credit to the real economy.

Data from Wind indicates that as of 18 November Chinese banks have issued one trillion yuan in bonds since the start of 2021, including perpetual bonds, second-tier capital bonds and convertible bonds.

Small and medium-sized banks account for the majority of issues, according to a report from the Chinese central bank’s Financial News.

2021 has also seen an acceleration in the issuance of special bonds by Chinese local governments to shore up the capital standing of smaller regional banks, by administrative regions including Tianjin, Inner Mongolia, Shaanxi and Jiangxi.

Domestic analysts say that regulatory authorities in China are providing greater support to smaller banks to use a range of methods to bolster their capital, in order to better support the real economy in the wake of COVID-19.

Bank of Ningbo recently announced that it would issue 601 million new shares at the end of November to raise funds of up to 12 billion yuan, all for the purpose of raising core tier-1 capital to improve its risk-resistance capability.

Bank of Wuxi has also recently announced that it plans to raise 2 billion yuan via a private placement of up to 320.5 million A shares, to raise funds to supplement tier-1 capital.

In addition to bond and share issues, regional lenders in China such as Bank of Jiangxi and Jiangxi Jinjiang Bank are also exploring the use of conversion agreement deposits (转股协议存款) to boost tier-one capital.

As of the end of the third quarter the capital adequacy ratio of China’s commercial banks stood at 14.80%, for an increase of 0.32 percentage points compared to the end of the second quarter.

Chinese regulators are expected to launch further measures to support capital supplementation by smaller-scale commercial banks.

“The next step is to accelerate the establishment of long-term effective mechanisms for capital supplementation by small and medium-sized banks,” said Dong Ximiao (董希淼), chief researcher with MUCFC.

“In addition to the issuance of perpetual bonds and local government special bonds to supplement capital, they could also continue to explore the use of convertible tier-2 capital bonds, and further strengthening the flexibility and diversity of capital supplementation tools, to reduce capital supplementation costs.”