MNI EXCLUSIVE: China May Loosen Rules On Insurers' Bond Buys

     BEIJING(MNI) - China could ease restrictions on insurers' purchases of

banks' perpetual bonds in order to boost demand, with smaller banks struggling

to meet required levels of additional tier 1 debt following a rush of issuance

in 2019, policy advisors told MNI.

     Chinese banks told CNY569.6 billion of perpetuals last year, doubling

average AT1 buffer levels to 1.03% of risk-weighted assets although still off

the minimum 1.5% required under Basel III. Only three of China's 4,000 regional

banks sold the securities in 2019, for a total CNY14.6 billion.

     Of the seven banks to receive approval for perpetual issuance so far in

2020, six are from the regions, with a combined quota of CNY100 billion. But

their plans are proceeding slowly due to lack of buyer interest, according to

Wang Yifeng, chief banking analyst with Everbright Securities and to Nicholas

Zhu, bank analyst at Moody's, who foresaw lower total perpetual sales this year.

     To boost demand, financial regulators are likely at some point this year to

ease restrictions barring insurance companies from buying perpetual bonds issued

by banks with less than CNY1 trillion in assets, two policy advisors told MNI.

Zhu agreed, although he considered that purchases will still be limited to bonds

sold by banks rated AAA.

     --DEMAND FROM INSURERS

     "This would be a very good move for policymakers. Insurance companies are

financial institutions and understand the operational logic of banks," said Wang

Jun, a member of the academic committee of China Center for International

Economic Exchange. Another policy advisor, who wished to remain anonymous, also

expected a loosening of rules restricting insurers' purchases of perpetuals, a

move which an official from one of the seven big Chinese insurance companies

told MNI would boost demand by smaller insurers for regional bank AT1s.

     Bank of Hangzhou, a regional lender, sold perpetuals in January, with a

4.1% coupon, 24bps higher than that on CNY80 billion of the securities issued by

the Postal Savings Bank of China, a state-owned national bank, in March.

     Regulators will want to ensure that buyers of perpetuals, which, as AT1

debt, can under Chinese rules be written off if the bank ceases to be viable,

are not taking on excessive risk, Wang Yifeng said.

     "The regulator has many tools to support issuance, so the price doesn't

rise. What matters is the financial risk of those regional banks," Wang said.

     Unlike the case with preferred shares, China does not require banks to

provide breakdowns of buyers of perpetual debt, meaning that some of this risk

may have collected in places not visible to the public, Zhu noted.

     --CAPITAL SHORTFALLS

     The banking system in China may need to raise CNY1.2-1.5 trillion to cover

capital shortfalls, mainly among regional lenders. Everbright Securities said in

a research report. Much of this need is for common equity tier 1 capital, which

will be hard to raise, given the difficulty facing regional banks wishing to

accumulate retained earnings or to issue shares, said Wang Yifeng and the

anonymous policy advisor.

     "With regards to issuing shares, there is a long line of companies waiting

for approval to list on the stock market in China. For retained earnings, the

economy is underperforming this year and the central bank has been calling on

banks to give up their profits thus lowering borrowing costs for companies," Zhu

said.

     Instead, some banks will need to turn to local governments. Bank of Gansu,

whose shares plunged by 40% on Apr. 1, disclosed on Tuesday that private

placements by Gansu government financing vehicles will top up its CET1 capital.

     Another likely outcome is consolidation. Cao Yu, vice chairman of the China

Banking and Insurance Regulatory Commission, said at a press conference on

Wednesday that the regulator will adopt stronger measures this year to push for

regional bank reorganisations and reforms.

     Bank perpetual bond issuance was authorised in December 2018, and the

People's Bank of China established a facility to swap them for highly-liquid

central bank bills, in order to encourage demand.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

--MNI Beijing Bureau; +86 (10) 8532-5998; email: archie.zhang@marketnews.com

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