China supplied 1 trillion yuan for special sovereign bonds to complete the sales.
China is considering giving its largest state banks up to 1 trillion yuan ($142 billion) in capital to strengthen their capacity to sustain the struggling economy.
The majority of cash will come from issuing new special sovereign bonds. The specifics are still being finalized and subject to change. Beijing introduced capital into its key banks for the first time since the 2008 global financial crisis.
China was rushing to replace its banks despite the top six having capital levels far beyond regulatory standards. It was after the country announced significant cuts to key policy rates and mortgage rates to boost the economy. Lenders like Industrial & Commercial Bank of China Ltd. and Bank of China Ltd. were brought in to improve the economy in recent years and are currently dealing with record low margins, declining profitability, and an increase in bad debt.
At a news conference in Beijing, Li Yunze, the top banking regulator, said that authorities would take action to increase the capital of core tier 1 at its six biggest commercial banks.
Theoretically, the big banks did not require additional capital to continue operating unless asked to take more credit risk, according to Francis Chan, a senior analyst at Bloomberg Intelligence. In this instance, one trillion RMB will approximately fulfill the purpose.
Megabanks have been facing a lot of pressure from the regulators to support the struggling economy by offering lower interest rates loans to high-risk borrowers, such as real estate developers to homeowners. Recently, after declining profit margins and earnings growth, some banks gave in to the pressure and paid their first interim dividends to help the stock market.
ICBC and BOC erased losses after the story was published, and trading in Hong Kong did not significantly change after 11:12 am.
China supplied 1 trillion yuan for special sovereign bonds to complete the sales. A 30-year bond was sold for a yield of 2.19%, which is a record low according to Bloomberg data.
The profits of China’s commercial lenders increased at the slowest rate by just 0.4%. Net interest margins have been declining in the meantime. At the end of June, they had dropped to 1.54%, much below the 1.8% required to sustain decent profitability.
Increased dividend payments also run the risk of reducing capital reserves at systemically significant banks, which are subject to higher capital requirements due to the so-called global total loss-absorbing capacity mechanism.
Retained profits have been the key source of increase in capital buffer for the six biggest banks, which include Postal Savings Bank of China Co., China Construction Bank Corp., Agricultural Bank of China Ltd., and Bank of Communications Co.
The end of June data shows that the average core tier 1 capital adequacy ratio was 11.77%, which is still higher than the 8.5% point that applies to China’s systemically important banks.
Beijing has previously engaged on behalf of its banks, most of which are still state-owned. When the key four banks’ non-performing loan ratio increased to roughly 40% in the late 1990s, China initially bailed them out. At the time, policymakers established state-run bad banks to buy 1.4 trillion yuan worth of failed loans at face value after selling special bonds to raise funds. It laid the foundation for over ten years of rapid expansion that made China the second-largest economy in the world and enabled many of its largest corporations to access international capital markets.
To recapitalize ICBC, the Bank of China and China Construction were underperforming under non-performing loans after decades of government-directed lending to unprofitable state-owned enterprises. The government also infused $60 billion in foreign reserves in the early 2000s. The banking industry underwent a ten-year transition that ended in 2008, with Agricultural Bank receiving a $19 billion bailout.