China: Banks May Sell Subordinated Debt to Local Govts for Capital

Source: Regulation Asia Editors, Regulation Asia 2020-08-26

Regulators are reportedly considering allowing small and midsized banks to sell subordinated debt to local governments to replenish tier 2 capital.

China’s financial regulators are considering expanding the types of instruments small and midsized banks can sell to local governments to raise capital, reports Caixin.

The move is aimed at making it easier and quicker for banks to strengthen their balance sheets and boost credit to businesses.

In July, the State Council announced it would allow 18 provincial-level governments to use up to CNY 200 billion (USD 28.9 billion) in total from this year’s CNY 3.75 trillion quota of special-purpose bonds (SPBs) to inject funds into banks in their jurisdictions that need support.

SPBs are a type of local government debt usually issued to fund infrastructure and public welfare projects that are considered commercially viable.

At the time, the government specified only one channel for investment – convertible bonds, which banks can use to replenish their core tier 1 capital.

According to Caixin, regulators are now considering allowing banks to also sell bonds, usually subordinated debt, to local governments to replenish tier 2 capital.

In addition, regulators are also proposing a new type of instrument based on the traditional bank deposit agreement – known as a BIC (bank investment contract).

Under a BIC, a local government would agree to maintain a deposit with a bank for a fixed period of time in exchange for a guaranteed rate of return.

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China: Banks May Sell Subordinated Debt to Local Govts for Capital

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