An abstract image of the Chinese flag merged with yuan banknotes.

Image: Getty Images

China’s largest banks are preparing to increase their capital raising to meet their requirements, and are weighing up the benefits of onshore versus offshore investors in the face of rising interest rates. Kimberley Long reports. 

The approaching capital requirements deadline for the largest banks is approaching and China’s largest financial institutions are weighing up how to best increase their buffers. 

China’s four largest state-owned banks — Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China — are classified globally significant, or G-SIBs. Under solvency regulations applied by the People’s Bank of China, the G-SIBs are required to have a minimum total loss absorbing capacity (TLAC) of 16% of their risk-weighted assets by 2025, and 18% by 2028. 

With the deadline less than two years away, it is expected that the G-SIBs will start to issue TLAC-compliant instruments during 2023. 

Vivian Xue, director of financial institutions at Fitch Ratings in Shanghai, says: “We believe the banks may choose to replace some of the maturing senior debts and capital instruments with TLAC debt in the issuance pipeline. We expect the total issuance needs for the four G-SIBs to reach Rmb1.6tn ($230bn) by Jan 2025, and Rmb5.8tn by January 2028, based on their reported capital and risk-weighted asset base at the end of the third quarter 2022. 

We believe the banks may choose to replace some of the maturing senior debts and capital instruments with TLAC debt in the issuance pipeline

Vivian Xue

“Given the huge issuance needs, we expect the G-SIBs will strive to increase their capital or TLAC-eligible debt issuance from this year and that the government will remain supportive of the banks in meeting their TLAC requirements.” 

Looking at the market capacity for raising debt, Fitch states the four G-SIBS issued around Rmb700bn in capital instruments and Rmb20bn in senior unsecured debt per year over the past five years. There is a further Rmb700bn in capital raising that has been announced, but had not been issued by the end of 2022. 

Investor focus 

Meeting the requirements will require significant investments to boost capital buffers. Fitch believes the potential investor base will be similar to those for bank capital instruments. “In the current structure for tier-two capital instruments, commercial banks account for around 30% of those bonds, wealth management products were around 30% and the remaining 40% was investors like funds and insurance companies,” Ms Xue says. 

It is likely that both onshore and offshore investors will be targeted, with the G-SIBs considering factors such as investor appetite and capacity, their international profile and the approval processes when deciding how the focus will be split.  

Michael Huang, associate director at S&P Global Ratings, notes that from a regulatory perspective, having an onshore and offshore division will reduce the contagion risk. The interest rate environment will impact where investors are coming from. “I think in the near term, it could be mostly onshore insurance because of the interest rate trend divisions between onshore and offshore, due to US dollar and geopolitical issues,” he says. 

He adds that in the past two or three years, offshore debt issuance has been limited. “In the short-term, the interest rate divergence and the investor appetite will decide where the demand will come from,” Ms Xue says.

Ming Tan, director at S&P Global Ratings, says: “The interest rate environment definitely is not that favourable for offshore issuance given rising interest rates. But the Chinese G-SIBS could benefit as offshore investors look for safer options and move away from the high yield property market due to ongoing concerns.” 

Ms Xue says the TLAC debt may have higher interest rates than existing senior unsecured debts to compensate for its loss absorption feature. 

New generation 

As China’s banks continue to grow, there may be more banks joining the G-SIBs bracket. It is possible that the Bank of Communications will become a G-SIB, based on the Bank of International Settlements methodology. Banks that score 130 and above are placed into Bucket 1 under the G-SIB designation; the Bank of Communications is scored at 127, suggesting it will reach the designation in the coming years.

Mr Huang says: “Bank of Communications’s capital adequacy ratio was around 14% to 15% recently, compared with 17% to 18% for the big four G-SIBS. The potential capital shortfall in terms of risk-weighted assets is much greater than the other G-SIBS. The impact would rely on the bank’s growth strategy as it faces the G-SIB designation.” 

Ms Xue says the bank will likely react to the requirements as it approaches the designation. “If facing higher capital requirements, we believe it will issue more capital or TLAC eligible debt to increase its capital buffers. It might also try to make its assets more capital-light and try to increase growth in areas with a lower risk-weight,” she says.



All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Top 1000 2023

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter