The China Securities Regulatory Commission (CSRC) and the China Banking Regulatory Commission (CBRC) have announced guidelines that allow commercial banks to issue corporate bonds for the first time in an effort to expand options for cash-hungry banks to raise capital.
Qualified issuers will include commercial banks listed on the Shanghai and Shenzhen stock exchanges, or banks that have issued shares on overseas markets, or have applied for A-share listings but are still at the stage of review. The CSRC may revise the guidance in future to allow more banks to issue corporate bonds, said the announcement.
The guidance, unveiled on Friday, firstly encourages commercial banks to issue corporate bonds with write-down clauses as a pilot trial for the other types of corporate bonds. A write-down clause results in a bond being written down to zero if the issuing bank is deemed to be non-viable by the CBRC.
Commercial banks with a plan to issue such debt should conform to relevant capital requirements by regulators and increase their ability to absorb losses, according to the guidance.
Chinese commercial banks mainly issue financial bonds, subordinated debt and hybrid capital bonds. They issue the bonds in the inter-bank market, which is supervised by the Central bank and its executive agency National Association of Financial Market Institutional Investors (NAFMII).
Corporate bonds, on the other hand, are issued on the stock exchanges, or the exchange market. Banks seldom tap the exchange market because the market accounts for a very small portion of the domestic bond market (3%). Enterprise bonds issued by non-listed companies and convertible bonds are also traded in the exchange market.
However, to meet regulatory requirements and their own development needs, commercial banks need to explore more ways to raise funds.
Some of them have much motivation in new issue attempts. Tianjin Binhai Rural Commercial Bank (TBRCB) raised Rmb1.5 billion ($244 million) by pricing the country’s first Basel III-compliant bond in July. The TBRCB bonds were issued and traded in the inter-bank market, not on stock exchanges.
In addition, Agricultural Bank of China announced in June that it planned to issue up to Rmb50 billion of loss-absorbing tier-1 and tier-2 capital instruments by the end of 2015. Bank of China, Industrial and Commercial Bank of China, and China Construction Bank also separately announced similar fundraising proposals for Rmb60 billion each.
CSRC and CBRC also said they would set more guidance for other types of corporate bonds for commercial banks in future, leaving room for creating more fundraising channels for the domestic lenders.
According to the guidance, each public issue of corporate bonds by a commercial bank requires approval from both regulators.