The financial landscape of China's banking sector has seen a remarkable development this year, with commercial banks issuing what are termed "perpetual bonds" and "Tier-2 capital bonds." As of the latest reports, the total amount issued has reached an astounding ¥14,782.5 billion, surpassing the entirety of last year's issuance, which stood at around ¥11,157.9 billionThis surge in issuance is primarily driven by the six major state-owned banks, which account for over half of the total bonds issuedHowever, it's the city commercial banks that have stood out with a staggering 138.5% increase in issuance compared to last year.

Experts in the industry attribute this trend to a multitude of factors such as imminent redemptions, capital requirements, and the ongoing pressure from funding costsThe year 2023 has seen commercial banks aggressively issue bonds to bolster their capital bases

As net interest margins continue to narrow, these bonds are likely to persist on an upward trend, particularly given the looming expiration of previously issued perpetual bonds.

Recent developments highlight a growing reliance on these forms of financingFor instance, the Industrial and Commercial Bank of China recently announced the completion of its Tier-2 capital bond issuance, with a scale of ¥40 billion, marking the beginning of what appears to be a robust pipeline for capital raise strategies among Chinese banksThis particular bond has a fixed interest rate of 2.37% over ten years, reinforcing the bank’s foundational capital as established by regulatory standards.

The issuance frenzy is not limited to Tier-2 bonds alone; perpetual bonds are also witnessing a significant uptickOn November 8, Ping An Bank disclosed that it had obtained regulatory approval for the issuance of perpetual bonds amounting to ¥20 billion, featuring a fixed rate of 2.45% for the initial five years

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Notably, several other banks have followed suit, showcasing the competitive urgency in the market for securing capital.

Data from financial information provider Wind illustrates the robust health of the issuance market this yearTo date, there have been 81 instances of Tier-2 bond issuance, reaching a total of ¥8,690.5 billion—this already eclipses the previous year's total of ¥8,435.9 billionBeyond this, the notable rise in perpetual bonds has been particularly striking, with issuance for these types nearly doubling compared to the previous year, reflecting an apparent surge in demand for long-term capital solutions.

Du Yang, a researcher at the Bank of China Research Institute, noted that the increasing issuance of these bonds effectively strengthens the banks’ capital bases, which is vital for both listed and non-listed entitiesHe highlighted that, because most listed banks are trading below their book values, avenues like equity issuances, which typically derive from capital market conditions, become less viable

Non-listed banks, especially smaller regional players, find it more challenging to raise capital through traditional means and thus rely heavily on instruments like Tier-2 and perpetual bonds.

The dynamics of China's economic landscape also demand that commercial banks increase their lending abilities to stimulate growth—this has intensified the necessity for capital-raising effortsWith the challenging economic conditions, maintaining a robust capital base enables banks to effectively support credit expansion while satisfactorily meeting regulatory guidelinesUnder pressure from reducing net interest margins, profitability has also faced challenges, limiting the extent to which banks can depend on internal capital generation through retained earnings.

In addition to the quantitative surge in issuance, the profiles of the issuing banks reveal a trend in which city commercial banks are particularly prominent in capital expansion efforts

They have launched an impressive total of 43 Tier-2 bonds this year, significantly up from approximately ¥918 million last yearThe pressures faced by smaller banks, such as city commercial banks, underscore the necessity of solid capital buffers as they operate under greater risk environments and economic fluctuations.

Du Yang explained that the high issuance numbers from city commercial banks are a reflection of their relatively lower capital buffer compared to larger institutionsTo achieve compliance with regulatory standards, these banks require additional capital more urgently than their larger counterpartsFurthermore, as the backbone of local economies, city banks need to sustain their lending capabilities for development projects, further necessitating their participation in capital-raising through these bond issuances.

Looking ahead, the issuance of Tier-2 and perpetual bonds is anticipated to maintain its growth trajectory

The decision-making processes within banks now weigh significantly towards exploring diverse funding avenuesThe general avoidance of traditional routes stems from a limited ability to generate profits which can be converted into additional capital reservesConsequently, the reliance on external capital sources has increased, making bond issuances a primary method of ensuring liquidity and capital adequacy ratios meet both operational and regulatory requirements.

Interestingly, recent quarterly reports from several primary banks indicate a strategic consideration for capital enhancements, with plans to approach regulatory guidelines meticulouslyThis careful orchestration speaks to a larger regulatory response to ensure adequate capital bases are maintained across the banking sector, particularly as financial pressures mountObservers anticipate a strategic focus not only on Tier-2 and perpetual bonds but also on general capital management efforts to ultimately enhance the stability of the financial system.

As the industry evolves, the momentum gained in issuing higher volumes of these bonds reflects a flexible banking strategy aiming to balance regulatory needs with operational stability