The State Council authorizes local governments to fund small banks

Source: Regulation Asia Editors, Regulation Asia 2020-07-06

According to reports, the State Council of China has agreed to allow local governments to purchase convertible bonds issued by certain small and medium-sized banks.

The State Council of China has officially approved local governments to use part of this year’s SPB (Special Purpose Bond) quota to inject capital into certain small and medium-sized banks.

SPB is a local government debt that is usually issued to fund infrastructure and public welfare projects that are considered commercially viable. Debt is usually repaid from the income generated by the projects it finances, rather than from financial revenue. This year's SPB quota is 3.75 trillion yuan, nearly 75% higher than the 2019 quota.

According to Caixin, the State Council agreed on Wednesday (July 1) to allow local governments to purchase convertible bonds issued by certain small and medium-sized banks as a channel for investment.

At the meeting, Premier Li Keqiang said: “One of the outstanding difficulties faced by small and medium-sized banks today is insufficient capital and limited ability to issue loans.” “The main purpose of this policy is to appropriately replenish the capital of small and medium-sized banks and enhance their Services for micro, small and medium enterprises."

Although the size of the plan and the details of which banks will be eligible have not been disclosed, earlier reports indicate that local governments will be allowed to purchase up to RMB 200 billion of "qualified capital supplementary instruments" issued by small and medium-sized banks.

According to the decision, the State Council recommended that local governments be aware of this risk, strengthen supervision when implementing the plan, and develop exit strategies to ensure that they can repay their SPBs.

The funding contract under the plan is expected to specify a fixed period, detailed repayment plans, and corporate governance and asset quality commitments.

special purpose bond

China’s State Council

The State Council authorizes local governments to fund small banks

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