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China banks raise record US$48b in Q1

Rush to strengthen their balance sheets using equity and debt offerings signals industry jitters

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China's banks had about two trillion yuan (S$402.7 billion) of nonperforming loans on their balance sheets at the end of 2018, more than double the amount in 2014.

Shanghai

CHINA'S banks are setting fundraising records in a rush to strengthen their balance sheets.

Firms have used equity and debt offerings to raise US$48 billion this year, the most for a first quarter, according to data compiled by Bloomberg. The flurry of issuance has had banks reach deep into the fundraising toolbox - especially bonds that count as capital. That includes the first-ever perpetual sold domestically by a Chinese lender as well as rarely-used convertible bonds and US dollar-denominated debt.

Bulking up on capital is a pressing need for the banks as they grapple with rising bad debt while being pushed to help the government achieve its economic growth targets. Policymakers are also calling on lenders to increase loans to China's cash-starved non-state sector, which would see them take on more risk.

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"Banks have been asked to increase their lending to the private sector," said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis SA in Hong Kong. "They need to increase their loan book, and to that end, their capital. All of this is to keep growth afloat."

The health of the world's largest banking system is of global importance, given its key role in propping up China's US$13 trillion economy. While most analysts foresee the government meeting its aim of 6-6.5 per cent of gross domestic product (GDP) growth, the nation continues to face challenges including faltering company profits and the US trade war. Urging the industry to lend more has been a favourite fallback for the country's leaders.

Banks had about two trillion yuan (S$402.7 billion) of nonperforming loans (NPL) on their balance sheets at the end of 2018, more than double the amount in 2014, according to the China Banking and Insurance Regulatory Commission. While the official NPL ratio across the industry was 1.83 per cent as at Dec 31, there is scepticism about the data as 80 per cent of respondents in a 2016 survey said that China's NPL figures are artificially low.

"The ongoing round of capital raising is different" from previous efforts, said Xia Le, Hong Kong-based chief Asia economist at Banco Bilbao Vizcaya Argentaria SA. "It's more precautionary in nature."

Regulators are keen to see the banks raise funds, with the banking watchdog last year calling on firms to use new ways to increase capital. In January, Bank of China Ltd sold the nation's first perpetual bank bonds, while China Construction Bank Corp issued US$1.85 billion of US dollar-denominated capital bonds overseas, and Bank of Communications Co announced plans for a convertible bond sale.

China's State Council said in February that it will be more "efficient" in approving banks' perpetual bond sales and also lower thresholds for issuance of preferred shares and convertible notes. The central bank in January introduced a swap programme designed to make perpetual bonds more liquid in secondary trading and therefore more attractive to buyers.

China's so-called Big Four banks also need to comply with incoming international rules. Industrial & Commercial Bank of China Ltd, Bank of China, China Construction Bank and Agricultural Bank of China Ltd are all on the Financial Stability Board's global too-big-to-fail list, a designation that will require the four to raise nearly four trillion yuan of capital by 2028, according to analysts at Everbright Sun Hung Kai Co.

"Considering that some of China's major banks are global systemic-important financial institutions, the capital raising should strengthen the world's financial system," said David Qu, a China specialist at Bloomberg Economics. BLOOMBERG