PBOC Enhances Liquidity Support for New Perpetual Bond Market

Perpetual bonds can be swapped for central bank bills and serve as eligible collateral for PBOC lending. Bank of China issuance was more than 2x oversubscribed.

The PBOC (People’s Bank of China) has announced plans to set up a CBS (central bank bill swap) facility to help improve the liquidity of perpetual bonds, a new fund raising instrument for banks.

Perpetual bonds serve as a low-cost, no-maturity form of funding for banks to help them meet capital adequacy requirements amid a shift of so-called ‘shadow loans’ onto their books and an environment of rising loan defaults.

According to a PBOC statement, perpetual bonds held by primary dealers participating in open market operations can be swapped for central bank bills, effectively enhancing their liquidity and making the new instrument more attractive for interbank bond market participants.

The CBS facility can accept perpetual bonds issued by banks whose capital adequacy ratio is at least 8 percent and NPL (non-performing loan) ratio is below 5 percent, among other conditions.

Additionally, perpetual bonds with ratings of at least “AA” or higher will qualify as eligible collateral for a medium-term lending facility, targeted medium-term lending facility, standing lending facility and re-lending. The aim is to encourage more banks to replenish capital through perpetual bond issuance.

Following approval from the FSDC (Financial Stability and Development Committee), Bank of China became the first bank authorised to issue a perpetual bond to replenish tier 1 capital. The CNY 40 billion (USD 5.9 billion), 4.5% yield issuance on Friday (25 January) was oversubscribed in the interbank bond market by more than double, according to Xinhua.

More than 140 investors participated in the subscription, including insurance  companies, which until recently were not allowed to buy capital instruments with unfavourable write-off positions.

Issuers have the right to write off perpetual bonds if their capital adequacy ratio falls to 5.125 percent, or if the CBIRC (China Banking and Insurance Regulatory Commission) has determined that the issuer would become non-viable without a write-off.

The average tier 1 capital adequacy ratio at Chinese commercial banks at end-September was 11.33 percent, down from 11.35 percent at end-2017, but still above regulatory requirements.

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