China is considering using about 200bn yuan ($28bn) in proceeds from government bond sales to help address risks in the banking sector, according to people familiar with the matter.
The debt will be part of the total issuance planned by the central government in 2020, and it’ll be used for measures including re-capitalisation for medium- and small-sized lenders, the people said, asking not to be named as they’re not authorised to speak publicly. Normally, it would be the central government to raise funds to finance such a purpose, they said, adding the plan is still under discussion and subject to changes.
How exactly the funds will be used to help the troubled banks isn’t yet clear. The Ministry of Finance didn’t immediately respond to a request for comment on the topic.
China’s central bank is trying to bring down borrowing costs across the economy to stimulate demand and help China grow out of the slump in the first quarter caused by the pandemic. That combined with rising bad loans and policies to give loan holidays to businesses will likely further squeeze the asset quality of the banking sector, especially the smaller ones.
“It’s inevitable that banks’ asset quality will be affected when the downward pressure in the economy is big,” People’s Bank of China Deputy Governor Pan Gongsheng said at a press conference this week, adding the regulators have asked banks to increase buffers and loan write-offs to prepare for a worsening situation over the next few years.
China’s government plans to sell as much as 8.51tn yuan of new debt this year, including 3.76tn yuan of general bonds, 3.75tn yuan of special infrastructure bonds and 1 trillion yuan of anti-virus bonds. China sold 270bn yuan of special sovereign bonds in 1998 to re-capitalize the then four state-owned banks.
China’s banking regulator said in January it will implement a series of measures to shore up the nation’s troubled smaller banks and insurers, such as carving out bad loans and promoting mergers, capital injections and the restructuring of high risk institutions. Other steps include setting up a resolution fund and bridge banks while introducing new investors and allowing market-oriented exits.
Many of China’s 3,000 small banks are coping with a mountain of bad loans and capital shortage. At least three regional lenders were bailed out or rescued last year costing at least $18 billion.
Chinese banks are poised to post an unprecedented drop in profits this year as they grapple with the fallout of the coronavirus. Lenders face additional credit costs of almost 1.6tn yuan, S&P Global forecast in April, warning the sharp increase would pressure their profitability and capital strength.
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