NPC Deputies Urge Chinese Provinces to Issue Special Bonds for Bank Capital

On March 12, amidst national banks replenishing their capital through special treasury bonds issued by the central government, several members of the national legislature called for provincial authorities to be permitted to regularly issue special bonds. The goal is to support local small and medium-sized banks in doing the same.

Under the guidance of the country’s financial regulators, provincial governments should be authorized to issue special bonds routinely to help smaller banks restore their capital, thereby establishing a sustainable long-term capital replenishment system. This was expressed by Liu Ya, who also serves as head of the Beijing branch of a major export-import bank, during the annual legislative session that concluded today.

Liu stated that some urban commercial banks and rural financial institutions are nearing their minimum tier 1 capital adequacy ratios, making urgent capital injections necessary. Allowing local governments to issue bonds to bolster the capital of smaller lenders would be crucial in alleviating their funding shortages and fostering steady business growth.

According to data from the national financial watchdog, the average capital adequacy ratio of large commercial banks stood at 18.2% at the end of last year. For joint-stock banks, it was 13.6%, whereas for smaller city banks it was 12.4%, and rural banks had a ratio of 13.2%.

One deputy from Zhejiang proposed that the province could serve as a pilot for allowing local authorities to regularly issue special bonds aimed at supporting smaller banks. The issuance could be carried out through a “self-examination and self-issuance” approach managed by the local government.

Such a measure would let local governments independently evaluate and issue bonds, enabling smaller banks that desperately need capital to access funds more swiftly and flexibly. This approach could help these banks better serve rural communities, farmers, agriculture, micro and small businesses, and residents, according to Dong Ximiao, chief economist at a major financial firm.

Transforming the use of special bonds from a one-time emergency measure into a long-term institutional practice could establish a robust system for replenishing capital among smaller financial institutions, Dong added.

He emphasized that after utilizing special treasury bonds or local government bonds for bank capital boosts, it is essential to implement ongoing supervision and behavioral guidelines to continuously monitor operations and detect potential risks early.

In July 2020, the State Council permitted local governments to use bond funds to support small and medium-sized banks in replenishing their capital, especially amid COVID-19 uncertainties. Issuance of such bonds still requires approval from national regulatory agencies.

Between 2020 and 2022, local authorities issued approximately 550 billion yuan (around 79.56 billion USD) through special bonds to enhance the capital of regional banks, based on figures from the central bank.

Following last year’s issuance of 500 billion yuan in special treasury bonds aimed at supporting state-owned banks, the latest government work plan proposes issuing an additional 300 billion yuan to similar ends.