Chinese banks scramble to raise capital and respond to calls to support the economy

People walk past the booth of China Construction Bank at the 2021 China International Trade in Services Fair (CIFTIS) in Beijing, China September 3, 2021. REUTERS/Florence Lo

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SHANGHAI, June 15 (Reuters) – China Construction Bank Corp (CCB) (601939.SS) began selling 60 billion yuan ($8.9 billion) of bonds on Wednesday, joining peers as they rush to rebuild their capital in response to stricter regulations and government calls. to support an economy affected by the virus.

The Chinese government has asked banks to help stabilize the world’s second-largest economy by lending to small businesses and sectors that have felt the brunt of COVID-19 containment measures in some of the country’s biggest cities in recent months. . Read more

From January to May, subordinated bonds sold by local banks, including Industrial and Commercial Bank of China Ltd (ICBC) (601398.SS) and Bank of China Ltd (BOC) (601988.SS) totaled nearly 400 billion yuan, a 42% jump from the same period a year earlier, data from credit rating firm Fitch Bohua showed.

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The debt frenzy comes as monetary easing in China pushes interest rates down and raising capital via equity sales is unlikely, with most banks trading well below book value .

The CCB will use proceeds from the sale of bonds through China’s interbank market this week to supplement its so-called Tier 2 capital. The lender will sell an additional 60 billion yuan of such bonds by the end of 2023, according to reports. exchange documents.

Separately, CCB also plans to sell up to 100 billion yuan of perpetual bonds in China to replenish capital, and up to $3 billion of additional debt in overseas markets.

The surge in bond issuance signals that “commercial banks are preparing and working to stabilize capital adequacy,” said Li Peng, associate director of banks at Fitch Bohua, who expects loans increase in the second half of 2022.

For big banks, raising capital also comes as they face tougher capital rules to absorb losses and avoid financial instability.

China has asked its four largest state lenders – ICBC, CCB, BOC and Agricultural Bank of China Ltd (601288.SS) – to meet specific total loss-absorbing capacity (TLAC) targets from from 2025. read more

The “big four” will face a capital shortfall of at least 3.5 trillion yuan over the next few years, French bank Natixis has estimated.

Small banks, many of which have limited access to capital markets or even depositors, face even tougher capital challenges at a time when the economy has slowed, threatening asset quality.

Concerns about profitability have pushed bank stocks to about half their book value on average.

The capital ratios of Chinese banks are above regulatory limits, but they are suffering from insufficient capital generation, as well as “the government’s incentive to ask banks to give up part of their profits” with cheaper loans to help stimulate economic activity, said economist Gary Ng at Natixis in Hong Kong.

“As a result, Chinese banks will only increasingly need to raise capital externally.”

($1 = 6.7249 Chinese yuan renminbi)

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Reporting by Samuel Shen and Andrew Galbraith; Editing by Sumeet Chatterjee and Christopher Cushing

Our standards: The Thomson Reuters Trust Principles.

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