Chinese considers allowing local governments to buy more types of bonds issued by banks for capital replenishment

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Chinese policymakers have told the banking regulator to cooperate with local governments to make plans for smaller banks to deepen reform and replenish capital.

Industry insiders say that authorities are considering expanding the type of bonds issued by small banks that local governments are allowed to purchase with special-purpose bonds, in a move to help them replenish capital.

China’s State Council has approved and issued guidelines for medium- and small-sized banks to deepen reforms and replenish capital, and local governments have started pushing forward the implementation of the guidelines, according to a statement released by the China Banking and Insurance Regulatory Commission (CBIRC) on Sunday.

“The most urgent task is to cooperate with local governments to draw a complete picture in the risks of the sector, check assets and debts and draft plans based on a case by case basis,” the CBIRC said.

Provincial-level governments are required to take a leading role in drafting plans for medium- and small-sized banks with their jurisdiction based on specific conditions of each city and each bank, according to the guideline.

The regulator noted that the local governments should not adopt “one size for all” approach and they are not required to seek unified progress.

The move is part of the eleven financial reform measures announced by the Financial Stability and Development Commission under the State Council in May.

An important part of the latest round of small bank reform fund injections by local authorities. On July 1, the State Council said that local governments will be allowed to help smaller banks to replenish capital to address their funding strains. The Ministry of Finance said it had allocated 200 billion yuan quota of special-purpose bonds to buy convertible bonds issued by smaller banks to help them replenish capital.

Small banks’ capital replenishment has been high on policymakers’ agenda and they have been considering providing new channels to enhance small banks’ capital, so that they can better serve small businesses hard hit by the coronavirus outbreak.

Relevant government agencies are researching the option of allowing local governments to use special-purpose bonds to purchase medium- and small-sized banks’ convertible bonds, tier-2 bonds – bonds used to increase the bank’s Tier 2 capital- and deposits convertible to equity shares, industry insiders close to regulators said.

The authority has already announced that local governments are allowed to buy banls’ convertible bonds and the Ministry of Finance has allocated 200 billion yuan quota of special-purpose bonds to 18 provincial governments for them to help small banks to replenish capital.

Industry insiders say the regulators are currently discussing whether local authorities should also be allowed to purchase other two type of instruments issued by small banks, as the high requirement for issuers of convertible bonds and the difficulties for small banks to get regulatory approval to issue convertible bonds make it difficult for securities instruments to effectively help small banks replenish capital.

Compared to convertible bonds, it’s easier for banks to get approval to issue tier-2 capital bonds. As of August 18 this year, more than 20 Chinese banks, mostly city commercial banks and rural commercial banks, have issued the type of bonds.