Special-purpose bonds help lenders replenish capital

Smaller banks in some provincial areas benefiting from unique opportunity

China's local governments have issued or announced plans to issue special-purpose bonds totaling 118.8 billion yuan ($18.3 billion) since July 2020 to help small and medium-sized banks replenish capital, defuse financial risks and better serve the real economy.

The Department of Finance of Jiangxi Province announced on Aug 17 it will issue a 10-year SPB worth 7.9 billion yuan, and the funds raised will be injected into four regional banks, including Hong Kong-listed Jiangxi Bank Co Ltd and Bank of Jiujiang Co Ltd.

The target banks said local governments will inject capital in the form of negotiated deposits which are convertible into their shares of common stock. It is an innovative instrument for small and medium-sized banks to replenish capital.

Bank of Shangrao Co Ltd, one of the target banks, said the SPB issuance will ensure that its capital adequacy ratio meets regulatory requirements while also helping it mitigate credit risks and improve its risk resistance capacity.

Shaanxi province will also issue a 10-year, 4.6-billion-yuan SPB to help Shaanxi Qinnong Rural Commercial Bank Co Ltd and 20 county-level rural credit unions.

The Inner Mongolia autonomous region issued two SPBs totaling 7.7 billion yuan on Aug 16 at the coupon rate of 3.12 percent, with the aim of supporting the development of eight rural commercial banks and credit unions, as well as Bank of Wuhai Co Ltd, a regional joint-stock commercial lender. The move followed the issuance of two other SPBs totaling 8.5 billion yuan by the Inner Mongolian government on Dec 30 to help small and medium-sized banks replenish capital.

As of Aug 19, Shanxi, Zhejiang, Guangdong, Fujian, Liaoning, Sichuan, Heilongjiang, Shaanxi and Jiangxi provinces, the Guangxi Zhuang autonomous region, the Inner Mongolia autonomous region and Tianjin municipality had all issued or announced plans to issue special local government bonds for this purpose.

The SPB issuances followed the State Council executive meeting on July 1 last year. At the meeting, authorities determined that China will focus on improving financial services to micro, small and medium-sized enterprises (MSMEs) to ensure their sound development.

One of the outstanding difficulties faced by small and medium-sized banks is insufficient capital and limited ability to issue loans. Therefore, special local government bonds will be allowed to appropriately support small and medium-sized banks in replenishing capital, thus ensuring the development of MSMEs and private enterprises, Premier Li Keqiang said at the meeting.

"Although it requires State-owned commercial banks to play an important role in improving financial services to micro, small and medium-sized enterprises, we should acknowledge that small and medium-sized banks have extensive connections to MSMEs, especially startups, and are indispensable for their development," Li said.

A quota of 200 billion yuan of SPBs has been earmarked to recapitalize small and medium-sized banks in 18 provincial areas, said Liu Rong, an official with the China Banking and Insurance Regulatory Commission.

The country's top banking and insurance regulator said on July 27 it had given approval to 16 local governments' capital replenishment solutions for small and medium-sized banks through the issuance of SPBs with a total value of 180.7 billion yuan.

"Small and medium-sized banks must increase their capital adequacy ratios so they can strengthen lending capacity and ramp up support for micro and small businesses. Increasing the capital adequacy ratio will also help protect small and medium-sized banks against risks and ensure the safety and stable operations of local financial systems," said Zeng Gang, deputy director-general of the National Institution for Finance and Development.

"During the process of capital injections, local governments can further adjust and optimize the corporate governance and management institutions of target banks, especially rural commercial banks and credit unions. In this way, local governments will not only provide small and medium-sized banks with more capital to improve their capacity to defend against risks and serve the real economy, but also promote their sound development in the long run via institutional reforms," Zeng said.