China to sell special sovereign bonds to boost bank capital

Combined profits at China’s commercial lenders rose just 0.4% in the first half, the slowest pace since 2020.

China said it will issue special sovereign notes to boost capital at its largest state-owned lenders.

The bond issuance is aimed at supporting big state banks to replenish their core tier-1 capital, Finance Minister Lan Fo’an said at a briefing in Beijing. The move will strengthen their capability to fend off risks and spur lending to better support the domestic economy, he added.

Bloomberg reported last month that China could inject as much as 1 trillion yuan ($142 billion) of capital into the top lenders, with funding mainly from the issuance of new special sovereign debt, people familiar with the matter said.

Authorities flagged in late September that they will boost core tier-1 capital at the six major commercial lenders, alongside a slew of other measures to shore up the economy. The move marks the first recapitalization of the lenders in more than a decade, as officials seek to salvage the industry from record low margins, sinking profits and rising bad loans.

The six largest banks — which include Industrial & Commercial Bank of China Ltd., Bank of China Ltd., Agricultural Bank of China Ltd., China Construction Bank Corp., Bank of Communications Co., and Postal Savings Bank of China Co. — have primarily relied on retained profits to increase capital buffers.

While the top six banks have capital levels that far exceed requirements, the move would give them bigger buffers to help regulators follow through on the recent spate of stimulus measures from broad reductions to mortgage rates to slashing key policy rates.

Their average core tier-1 capital adequacy ratio fell slightly to 11.77% as of June from end-2023, but remains above the 8.5% level required for China’s systemically important banks.

The big four banks led by ICBC had a total 3.3 trillion yuan of core tier-1 capital in excess of regulatory requirements as of June, Bloomberg Intelligence analysts led by Francis Chan wrote in a report last month. A new capital injection would allow them to lend more boldly and absorb more loan losses, Chan said.

Combined profits at China’s commercial lenders rose just 0.4% in the first half, the slowest pace since 2020. The sector’s net interest margins have continued to shrink, hitting a record low of 1.54% at the end of June. That’s below the 1.8% threshold regarded as necessary to maintain reasonable profitability.

Higher dividend distribution also threatens to erode capital buffers at the systemically important banks, which face additional capital requirements under the so-called total loss-absorbing capacity mechanism imposed globally.