MNI: China’s Policy Banks Need Capital Boost In Growth Push

China’s three policy banks are expected to recapitalise to meet demands for increased lending to bolster growth at a time when Beijing has taken a conservative approach to expanding the balance sheets of its central bank and fiscal authorities, policy advisers and economists said.

China Development Bank, Export-Import Bank of China, and Agricultural Development Bank of China will have a more prominent role in financing infrastructure and other key sectors to support economic recovery, which will be critical in shaping confidence about longer term growth, said Liao Qun, chief economist at Chongyang Institute for Financial Studies at Renmin University of China.

The policy banks provided a record CNY2.7trillion of new loans in 2022, jumping 65% on an annual basis and accounting for 13% of total new yuan loans as the central government and the People’s Bank of China strengthened their credit capacity to boost infrastructure investment and bail out real estate developers. (See MNI: China's Rebound At Risk From Balance Sheet Recession)

The fast expansion of balance sheets could require policy banks to recapitalise even though they are backed by sovereign credit, said Liu Xiaochun, deputy dean of China Academy of Financial Research.

Policy banks should consider taking a market-oriented approach to replenishing capital, such as through the issuance of perpetual bonds as China’s fiscal authorities - the banks’ shareholder - have less capacity to inject funds given competing demands on the public purse, he said. Export-Import Bank of China issued CNY60 billion of perpetual bonds in 2021 to boost its capital, the first policy bank recapitalisation based on market funding.

The trio raised fresh funds of around CNY1.54 trillion last year via debt issuance as the State Council expanded their credit quota by CNY800 billion and approved over CNY740 billion of a “policy and development financial tool”. The PBOC also provided CNY630 billion of relending via Pledged Supplemental Lending to help developers and infrastructure investment. (See MNI: PBOC To Cut Borrowing Costs, Support Liquidity In Q1)

Liao said capital requirements for policy banks are not as onerous as commercial banks as they are state backed. The PBOC could provide capital for the policy banks from its USD3 trillion of foreign exchange reserves.

Regulators set a minimum capital adequacy ratio of 10.5% for policy banks in 2015 when the PBOC injected USD48 billion and USD45 billion into China Development Bank and Export-Import Bank of China, respectively, using foreign exchange reserves.

The capital ratios of policy banks are less transparent than commercial banks. According to China Development Bank, its ratio in 2021 was 11.66%, higher than the regulatory standard but much lower than the average of 15.13% among commercial banks that year.

SUPPORTING GROWTH

Playing a quasi-fiscal role, the policy banks are effective tools for the authorities when counter-cyclical efforts are needed to offset an economic slowdown and credit weakness, in coordination with expansionary monetary and fiscal policies.

Liao said funds provided by policy banks could leverage capital sourced from private investors and commercial bank loans by 8-10 times. This would be important in helping infrastructure investment increase 10-12% this year, up from 9.4% in 2022, and steering GDP growth towards 7% this year and an average 4-6% over the next 15 years.

A policy advisor, who requested anonymity, said China relied heavily on policy banks to expand their balance sheets to support growth rather than quantitative easing deployed by western central banks. Policy bank debt is not included in the fiscal deficit and their bonds can be used as collateral for the PBOC’s policy tools, such as medium-term lending facility and open market operations, he said. As the low-cost funds can be used selectively, they are considered a “good option” by the policy makers.

The advisor predicted the targeted “policy and development financial tool” will be expanded further this year to replenish the capital of major infrastructure projects as fiscal policy has been squeezed by lower land sales revenues and increased special bond repayments. He said an interest rate of 3%-4% for funds provided by the tool for a 20-year project was much lower than a long-term commercial bank loan, plus it draws two-years of interest subsidies from fiscal authorities.

Liao said further monetary policy easing required coordination with policy banks. There is room for cuts to policy rates and the reserve requirement ratio, while targeted tools would also be strengthened to support key sectors such as infrastructure and green transition.