China: Local Govts to Replenish Capital at Smaller, Midsize Banks

Source: Regulation Asia Editors, Regulation Asia 2020-06-24

Local governments will be allowed to buy ¥200bn in capital replenishment tools issued by small and midsize banks, with a fixed term, detailed repayment plan, and assurances on corporate governance and asset quality.

Chinese policymakers are planning to allow local governments to replenish the capital of certain small and midsize banks in an effort to defuse bad-debt risks, reports Caixin.

According to PBOC (People’s Bank of China) data on the 4,005 small and midsize banks in China, 605 of the banks did not meet the 10.5% minimum required capital adequacy ratio as of April. Of these, 532 were considered at high risk.

Under the plan, local governments will be allowed to purchase up to CNY 200 billion of “qualified capital replenishment tools” issued by small and midsize banks – which could comprise common stock, preferred stock, convertible bonds and perpetual bonds.

Local governments are most likely to buy banks’ convertible bonds because of they have fixed terms between one and six years, and they can be converted into bank shares and sold to recoup the investment if banks are unable to repay.

Banks are able to use the proceeds from selling convertible bonds to replenish their core tier 1 capital, the highest-quality capital that a bank has to absorb losses.

Officials are said to be working on a list of banks that will be covered under the recapitalisation programme, though it is as yet unclear how the capital will be allocated.

The programme aims to ensure that local governments receive their money back within a certain period of time, building into each funding contract a fixed term, detailed repayment plan, and assurances on corporate governance and asset quality.

Local governments will effectively raise the CNY 200 billion in funding to recapitalise banks’ by selling special-purpose bonds, a kind of local government debt that is commonly used to fund infrastructure and other public welfare projects that are considered commercially viable.

Last month, the NPC (National People’s Congress) set this year’s special-purpose bond quota for local governments at CNY 3.75 trillion, almost 75% higher than 2019’s quota of CNY 2.15 trillion, as it seeks to help offset the economic impact of the coronavirus pandemic.

China: Local Govts to Replenish Capital at Smaller, Midsize Banks

Subscribe to Our Newsletter!

Subscribe to Our Newsletter!