China capital injections help reform policy banks, fuel growth

BEIJING - China has finished pumping capital into two of its three policy banks, a major part of measures to reform these non-commercial lenders and underpin the struggling economy.

The China Development Bank (CDB) received $48 billion and $45 billion was channeled to the Export-Import Bank of China (EXIM) from the country's huge foreign exchange reserve this week.

After the injection, CDB's capital adequacy ratio (CAR), a measure of an institution's ability to cushion loan risks, increased to 11.41 percent, from 9.06 percent at the end of 2014. EXIM did not disclose any previous figures, but its ratio is now 12.77 percent.

An anonymous source with the central bank told Xinhua that the government was working to "gradually" pump funds into the Agricultural Development Bank of China (ADBC), but these funds will not be from the forex reserve.

"The capital injections mark a key step in reforming the cash-strapped policy lenders, who can not take deposits like commercial banks do," said Wang Jun, a senior researcher with the China Center for International Economic Exchanges.

"The move will improve the financial condition of policy banks and make them more resistant to risks," said Wang.

These lenders were set up in 1994 to provide financial support to policy-driven businesses.

CDB is mainly responsible for raising funds for large infrastructure projects; EXIM for promoting foreign trade and investment; ADBC for agriculture and the rural economy.

With thin margins, the government-backed policy banks are not profit driven. Limited and usually unstable capital sources led to their weak capital positions prior to this week's injections.

To make things worse, lending aspirations made some of their investment very risky as the government did hold them to the CAR requirement.

The State Council issued a guideline for banks in April that overhauled corporate governance, improved liquidity, and controlled loan risks. The guideline said the three policy banks should be regulated with CAR requirement, without giving further details. The market, however, widely expected the ratio to be no less than 10.5 percent, as with commercial banks.

"The CAR requirement can help ward off risks and prevent policy banks from expanding blindly. It is very necessary," said Ding Zhijie, an assistant to the president of the University of International Business and Economics.

Policy banks have come under the spot light as China pushes ahead with large-scale urban development and strives to export some of its industrial capacity.

Stronger policy banks could benefit the broader economy, according to rating agency Fitch in a research note.

"The capital injections will reinforce the banks' policy roles and strategic importance to the state, as well as strengthen their ability to provide funding to areas not favored by commercial banks," it said.

The agency expects CDB and EXIM to become more involved in the Belt and Road Initiative, with CDB also providing support to housing projects.

Should EXIM approve funds to foreign projects with Chinese participation, this could increase demand for domestic industries that may have been struggling with overcapacity and faltering exports.

The direct dollar injection is also likely to help EXIM, who has up to now relied on bond issuances for foreign currency funding.

"We expect the policy banks to take on a greater role in supporting the domestic economy, especially in areas where the risk-reward profile may not be attractive to commercial banks," said Fitch.