China pledges more support for banks' perpetual bonds to boost lending

BEIJING (Reuters) - China will provide further support for banks’ perpetual bond issuance, including examining ways to broaden the investor base for such bonds, to help boost lending in the economy, a vice central bank governor said on Tuesday.

A China yuan note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

“Perps” - bonds with no maturity date - are seen as a major step toward recapitalisation of banks, whose lending capacity to the real economy is largely limited by their capital adequacy.

Perpetual bonds could potentially convert the debt into equity as more banks actively prepare to sell such bonds, Pan Gongsheng, vice governor of the People’s Bank of China (PBOC), told reporters at a briefing in Beijing.

Last month, Bank of China Ltd, the country’s fourth-largest lender issued the first-ever perpetual bonds by a Chinese bank, with yields at the low end of market expectations and a bid-to-cover ratio of more than 2.

Insurance companies, securities firms and offshore institutions subscribed for the bank’s perpetual bonds.

“Other banks are actively preparing for issuing perpetual bonds to replenish capital,” Pan said.

“The central bank will work with relevant government departments to further improve the policy framework on perpetual bonds and support banks’ efforts to replenish capital via multiple channels to enhance their ability to support high quality growth of the real economy,” he said.

Pan said China could allow qualified long-term investors, such as mutual funds, as well as high net-worth individual investors to invest in such bonds.

He added the government does not have any quantitative target on the issuance of perpetual bonds.

China’s 261 trillion yuan ($38.5 trillion) banking sector, especially smaller regional lenders, is facing pressing needs to replenish relatively thin capital to cushion against rising bad loans in a cyclical economic slowdown and heed government calls to ramp up credit expansion.

In the past months, policymakers have rolled out a series of policies supporting the issuance of perps, including allowing primary dealers to temporarily swap these bonds for central bank bills to increase the liquidity of perps and make them more attractive to investors and potentially cheaper for banks to issue.

The central bank will soon begin conducting those central bank bills swap (CBS) and charge fees based on market rate, said Sun Guofeng, head of the PBOC’s monetary policy department, adding that the scheme will not expand without limit.

Pan also said the bill swap scheme is not “China-style quantitative easing” and has neutral impact on market liquidity.

Chinese banks’ capital adequacy showed slight improvement last year but with many listed banks now trading below their book values in a weak stock market, lenders, especially smaller one with weaker asset quality, find it challenging to sell additional shares and are increasingly looking to the onshore bond market to take advantage of current low yields.

Chinese banks’ capital adequacy ratio was 14.02 percent at the end of 2018, up 0.55 percentage points from a year earlier, while their tier-1 capital adequacy ratio rose 0.24 percentage points on-year to 11.58 percent at end-2018, Cong Lin, head of law and regulation department at the China Banking and Insurance Regulatory Commission, said at the briefing.

Reporting By Kevin Yao; Writing By Shu Zhang; Editing by Jacqueline Wong