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China to use perpetual bonds to boost banks’ capital adequacy


Source: Financial Times    Published: 2018-12-26

China will encourage commercial banks to replenish capital by issuing perpetual bonds, offering a new tool for lenders facing pressure to improve capital ratios amid a slowing economy and tightening regulation.

The country’s banks are under pressure to boost capital as new rules on shadow banking have curbed their ability to skirt capital adequacy requirements by shifting loans off balance sheet. A slowing economy and rising defaults are also expected to pressure banks’ capital ratios.

Bank of China, the country’s fourth-largest lender by assets, said in April that it planned to issue up to Rmb40bn ($5.8bn) in perpetual bonds by end-2020 to replenish tier-1 capital. A person close to the bank said on Wednesday that BoC was now stepping up preparations for the sale.

Industrial and Commercial Bank of China, the world’s largest bank by assets, said in August that it planned to raise up to Rmb210bn in capital from through end-2020, without specifying the type of security.

The office of the Financial Stability and Development Committee, the cabinet-level entity created last year to co-ordinate between China's various financial regulatory agencies, met on Tuesday to study ways to promote commercial banks' capital-raising, according to a statement on Wednesday.

The committee aims to promote the start of perpetual bond issuance “as quickly as possible”, it said.

Until 2013, Chinese banks relied exclusively on common equity to meet capital requirements, but they have since adopted a diverse range of funding instruments. These include preference shares, also known as “ coco bonds”, and tier-2 capital bonds, often called “Basel bonds”.

China has forcefully implemented the global Basel III rules on bank capital in order to force domestic lenders to fortify themselves against a rise in bad loans following a decade of rapid credit growth.

Perpetual bonds could offer an additional tool to allow Chinese banks to meet capital adequacy requirements at a lower cost than with common equity.

“Though most banks’ capital adequacy ratios currently look healthy, capital consumption is quite heavy, including from the movement of assets back on balance sheet and establishing separately capitalised wealth management units,” said Dong Ximiao, senior researcher at the Chongyang Institute for Financial Studies at Renmin University in Beijing. “So it’s necessary to broaden channels for capital raising.”

Mr Dong added that small, unlisted banks would benefit most, since they have less access to other capital-raising tools such as preference shares and convertible bonds.

Asian non-financial companies have embraced perpetual bonds in recent years as a source of low-cost fundraising. But Chinese lenders have been waiting for explicit guidance from domestic regulators on what features such instruments must include in order to count as regulatory capital under China’s implementation of the Basel regime.

In March, China's banking regulator instructed commercial lenders to experiment with innovative capital instruments, including both convertible and perpetual bonds.

Global banks have also resorted to perpetual bonds as they seek to lower the cost of complying with Basel requirements. HSBC issued £1bn in perpetual, convertible Basel-compliant bonds in September.

Dong Ximiao is a senior fellow at Chongyang Institute for Financial Studies at Renmin University of China.

Key Words:banks’ capital   perpetual bonds   Dong Ximiao  

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