China is considering a significant move to inject up to 1 trillion yuan (approximately $142 billion) into its largest state banks. This initiative aims to enhance these banks’ capacity to support a struggling economy. While the exact details are still being worked out, sources indicate that this funding will mainly come from issuing new special sovereign bonds. This action marks the first major capital infusion into big banks by the Chinese government since the global financial crisis in 2008.
Why Is This Happening?
The Chinese government is urgently working to boost its banks, even though the top six banks already have capital levels that exceed regulatory requirements. The need for this capital boost arises after the government announced broad reductions in mortgage rates and significant cuts to key policy rates, aiming to revive the economy. Despite their solid capital levels, banks like Industrial & Commercial Bank of China and Bank of China are facing challenges such as record low profit margins, declining profits, and rising bad debts.
Li Yunze, the top banking regulator in China, recently stated that the government would take steps to improve the core tier 1 capital at its six major commercial banks. However, specific details about these actions were not provided. The National Financial Regulatory Administration did not respond to requests for further comments.
The Situation with Mega Banks
China’s largest banks are under increasing pressure from regulators to provide cheaper loans, especially to high-risk borrowers, which include real estate developers and cash-strapped local governments. In a recent move, some banks even paid their first-ever interim dividends to help support the stock market, despite experiencing falling profit growth and margins.
The timing for this funding is favorable for the government. Earlier this year, China began issuing 1 trillion yuan in ultra-long special sovereign bonds, with plans to complete the sales by mid-November. In a recent auction, a 30-year bond was sold at an average yield of 2.19%, marking a record low.
Financial Challenges in the Banking Sector
In the first half of the year, the combined profits of China’s commercial banks rose by only 0.4%, the slowest growth since 2020. Additionally, the banks’ net interest margins continued to shrink, hitting a record low of 1.54% at the end of June. This is below the 1.8% threshold needed for reasonable profitability.
Higher dividend payouts also pose a risk to the capital buffers of these major banks, which face stricter capital requirements under the global total loss-absorbing capacity mechanism. The six largest banks—including Agricultural Bank of China, China Construction Bank, Bank of Communications, and Postal Savings Bank—have primarily relied on retained earnings to strengthen their capital positions.
Current Capital Position of Major Banks
As of the end of June, the average core tier 1 capital adequacy ratio for these banks was 11.77%, still above the 8.5% minimum requirement for systemically important banks in China.
A History of Government Support
This isn’t the first time the Chinese government has intervened to support its banks, most of which are still majority-owned by the state. In the late 1990s, during a crisis when non-performing loans surged to about 40%, the government sold special bonds and established state-run “bad banks” to purchase 1.4 trillion yuan in troubled loans. This initiative helped pave the way for a decade of rapid growth, turning China into the world’s second-largest economy.
In the early 2000s, the government also recapitalized banks like ICBC, Bank of China, and China Construction Bank with $60 billion of foreign reserves, addressing the issues caused by years of government-directed lending. Additionally, in 2008, Agricultural Bank received about $19 billion in a bailout, concluding a decade-long restructuring of the banking sector.
Conclusion
As China grapples with economic challenges, this potential capital injection into state banks highlights the government’s commitment to stabilizing the financial sector and stimulating economic growth. While the situation is still unfolding, it’s clear that the Chinese government is taking significant steps to support its banks and, by extension, the broader economy.
