Chinese banks borrow much ahead of tougher rules

BEIJING - Chinese banks are rushing to issue bonds for more funds in a bid to meet stricter capital adequacy requirements set to be implemented next year.

The Bank of Ningbo, a Zhejiang-based lender, on Thursday launched bids for subordinated debts worth 3 billion yuan ($476 million), following a 40 billion yuan issuance by the China Construction Bank on Tuesday.

About 150 billion yuan of subordinated debts are expected to enter the bond market towards the end of the year, according to borrowing plans revealed by banks.

Financial institutions disclosing similar plans include the Bank of China, 23 billion yuan, the Agricultural Bank of China, 50 billion yuan, the Shanghai Pudong Development Bank, 10 billion yuan, the China Merchant Bank, 23 billion yuan, and the Huaxia Bank, 10 billion yuan.

The borrowing spree comes as a new banking capital regulation is due to come into effect on Jan 1, 2013. The regulation has been made in accordance with the Basel III rules agreed by G20 countries in 2010.

According to the regulation released in June, the core capital adequacy ratio for "systematically important banks" should reach a minimum of 9.5 percent before the end of 2013.

Other banks should raise their core capital to no lower than 8.5 percent of their total assets by the end of 2016.

The moves were fueled by the needs for banks to restructure their capital structure and meet stricter rules next year, said Zhao Qingming, a financial expert at the University of International Business and Economics.

The regulation also stipulates that subordinated debts will not be seen as regulatory capital next year unless banks have written down their assets accordingly or covert them into shares.

"Under the context, it is important for banks which intend to raise money from bonds to grasp the remaining period of the year," Zhao said, adding that the timing was good as disappointing stock investors are turning to the bond market.

The tougher rules, which aim to control banking risks, are introduced at a time when Chinese banks are facing an enduring credit crunch due to huge market demand and the government's tightening efforts to mop up liquidity.

The government has spent two years trying to tame inflation and real estate prices. In the period, the People's Bank of China, the central bank, raised benchmark interest rates five times and the amount of cash banks are required to put aside as reserves 12 times, to cool the economy.

Latest financial reports showed that most banks met the new rules. But their core capital adequacy ratios have shown signs of declines during the third quarter.

The Huaxia Bank saw its core capital drop to 8.43 percent of total assets at the end of September, down from 8.72 percent from the end of last year. The ratio for the Bank of Ningbo decreased 0.28 percentage point to 11.89 percent in the same period.

Industry insiders estimated that if the economy expands by 8 percent annually, Chinese banks will have to keep its lending growing at 15 percent in order to support the growth. Then securities will be an important financial instrument to the banks which are expected to face large capital holes following the new rules.

Chinese commercial banks have issued 13 subordinated bonds totaling 60 billion yuan in the first ten months of 2012, said the Wind Information, a Shanghai-based financial data provider.