MNI EXCLUSIVE: Regional Chinese Bank Investors May Bear Losses

--Government Bond Issuance To Recapitalise Banks

--Shareholders, Some Bondholders May Face Losses

     BEIJING(MNI) - Part of the proceeds from a CNY1 trillion special issuance

of Chinese government bonds will be directed towards recapitalising regional

banks, officials and policy advisors said, with one source close to the

regulator telling MNI that existing shareholders will have to take losses as

authorities move to strengthen the financial system following the Covid slump.

     Funds from Treasury bond issuance could be channelled into local government

special funding vehicles set up for banks running short of core Tier 1 capital,

or local administrations could take equity stakes via financial holding

companies or local state-owned enterprises, a source close to the regulator

said, adding that the People's Bank of China would eventually make up the

difference if the moneys raised were insufficient to cover shortfalls.

     Chinese authorities have emphasised that any recapitalisation should be in

line with market principals, which the source said implied that bank

shareholders would bear losses. But bondholders might be less at risk, according

to another source, who also asked to remain anonymous, noting that bailouts for

Bank of Jinzhou in 2019 and Bank of Gansu in 2020 did not inflict losses on

creditors.

     Supervisors will be guided by their desire to avoid market shockwaves, said

Nicolas Zhu, a bank analyst with Moody's in Beijing. When Baoshang Bank was

rescued in May 2019, investors with maturing senior debt were made to bear

losses, but a larger amount of outstanding senior bonds were left untouched to

avoid unsettling markets, he observed.

     --SUPERVISORS TO AVOID UNSETTLING MARKETS

     "This shows the boundaries between different classes of capital is not that

rigid in China. The government's bottom line is to avoid triggering a systemic

crisis causing ripples through financial markets," Zhu said.

     While capital levels at China's regional banks' have been significantly

eroded during the Covid-19 slowdown, supervisors are also cracking down on other

irregularities, including techniques to disguise the real identity of

shareholders, such as by registering ownership under the names of junior

employees, including, in some cases, those of children's nannies or drivers.

Such practices have avoided disclosures of conflicts of interest in providing

loans and enabled the violation of prohibitions on ownership of controlling

stakes in more than one bank, authorities believe. Some influential shareholders

have used banks as private "ATM machines," according to a statement from China's

Banking and Insurance Regulatory Commission.

     Supervisors have indicated illegally-held shares will be transferred to

other qualified investors. These are likely to come from the public sector,

according to Wang Jun, a member of the academic committee of China Center for

International Economic Exchanges and chief economist at Bank of Zhongyuan.

     Reinforcing banks is key to officials' hopes of increasing the flow of

credit to small businesses. But, after the pandemic-hit economy contracted by

6.8% in Q1, China's 1,771 regional banks have probably seen their overall

capital adequacy ratio dip close to levels foreseen in the worst-case scenario

in last year's PBOC stress test, according to Zhu. This foresaw capital at the

banks, with CNY103.72 trillion in outstanding loans at the end of 2018, dropping

to 9.42%, 108 bps lower than the minimum.

--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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