Chinese perps challenge international market

Chinese banks are expected to issue almost $21 billion in perpetual bonds this year. This will have a marked knock-on effect in the international capital markets.

The anticipated issuance of more than Rmb140 billion ($20.9 billion) perpetual bonds - fixed income debt with no maturity date - by Chinese banks will shake up the international perpetual bond market. 

All things being equal, such a large boost in the supply is likely to increase the cost of their issuance internationally, explained Alicia Garcia Herrero, Asia Pacific chief economist of Natixis.

“For the rest of the world, the question really is how many [Chinese perpetual bonds] will go offshore. Chinese banks will then compete with other major banks for capital which could drive up the cost,” Herrero said.

Although most Chinese perps are expected to print onshore, even these are likely to pose competition to those issued by international banks, because foreign investment in China’s onshore market is growing.

Foreign holdings of Chinese bonds via Bond Connect, the Hong Kong platform which enables international investors to trade Chinese bonds, surged 37.3% year-on-year to Rmb1.75 trillion by the end of February. An additional 59 international investors - largely global top asset managers - joined Bond Connect in February raising the number of institutional investor to 617, according to the platform

Foreign insurance or asset management companies are potential buyers of Chinese perps, not only because they are long-term assets which match their long-term liability structure, but they are also likely to welcome the widening choice offered by the new issuance 

International investors including central banks, insurance companies and asset managers were among the investors of the first perpetual bond to be issued by a Chinese bank, which was the Bank of China’s (BOC’s) Rmb40 billion perpetual bond issued onshore in late January

BOC's perp has a coupon of 4.5% which may be adjusted up or down every five years. It also comes with a write-down trigger if the bank's core Tier 1 ratio falls below 5.125%.


After BOC’s Rmb40 billion debut, a further Rmb100 billion is expected from other Chinese banks. At the start of the month, Shanghai-listed Huaxia Bank said that it planned to issue Rmb40 billion perps; China Minsheng Bank has said that it intends to issue Rmb40 billion such debt; last summer, Shengjing Bank said it would sell Rmb9 billion perps, while Harbin Bank's debt issuance plans include up to Rmb15 billion perps.

In late February, Pan Gongsheng, vice-governor of the People's Bank of China (PBOD) told reporters that other Chinese banks besides BOC were “actively preparing” to issue perpetual bonds. The Chinese government intends to provide further support for such issuance, including ways to broaden the investor base for such bonds, he said.

In recent months, the Chinese authorities have implemented various measures to encourage banks to issue perpetual bonds. In late January, for example, the PBOC announced that it would swap perps for central bank bills to boost their liquidity. That same day, the China Banking and Insurance Regulatory Commission said that it would allow insurers to invest in perps and Tier 2 paper.

Beyond perpetual bonds, Chinese banks need to issue more Tier 2 bonds to replace existing Tier 2 capital. French investment bank Natixis estimates that Rmb652 billion of Tier 2 debt needs to be refinanced.

“We expect to see more plans to issue Tier 2 bonds over the next two years,” said Gary Ng, Asia Pacific economist of Natixis.

At the start of the month, for instance, ICBC said that it would issue up to Rmb110 billion of Tier 2 bonds in China’s interbank bond market, to which foreign investors have access.

Chinese banks need to replenish their capital so that they can increase their loans to China’s cash-strapped corporate sector. At this month's National People's Congress, the large state-owned commercial banks were ordered to increase their loans to small and medium enterprises (SMEs) by 30% this year.

A March report from ratings agency Moody’s said that increased lending to SMEs from banks is credit negative. But the risk is manageable, because commercial banks are in a good position to mitigate the potential deterioration of asset quality associated with increased lending to private companies. That is if they maintain their underwriting standards, it concluded.


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