The dynamics of China's perpetual bond market have shifted markedly in the early months of 2023, prompting significant attention from analysts and industry experts alikeAfter experiencing a spirited uptick in 2022, the volume and frequency of bank-issued perpetual bonds—specifically the second-level perpetual bonds—have shown a conspicuous decline compared to the previous yearBy February 18 of this year, only two banks, Guilin Bank and Postal Savings Bank, had either completed or were awaiting the issuance of perpetual bonds, summing to a modest total of less than 30 billion yuan.

This noticeable contraction in obligatory bond activities can be attributed to an array of factorsExperts consulted have indicated that a bank's capital planning and refinancing requirements are critical influencers of its ability to issue these financial instrumentsAdditionally, external conditions, such as holiday season disruptions and the overarching market environment, play a crucial role in determining issuance patternsLooking ahead, projections for 2025 suggest that state-owned banks are expected to maintain a robust high in their perpetual bond issuance levels, counterbalancing the current lull in activity.

A close examination of trends over recent months reveals a diminishing enthusiasm among banks for issuing these financial instrumentsData sourced from the China Wealth Management Network illustrates that as of mid-February, the issuance rate for second-level capital bonds for the year thus far stands at zeroNotably, only Guilin Bank has successfully issued a bond this year, with Postal Savings Bank currently preparing to issue its first perpetual bond in 2025.

On February 18, Postal Savings Bank announced a subscription range for its perpetual bond issuance, indicating plans to offer "2025 Undated Capital Bonds (First Phase)" with a target issuance size of around 20 billion yuanObservers note that this marks the second time a bank has issued a perpetual bond in 2023, following Guilin Bank's issuance of a 30 billion yuan bond at a coupon rate of 2.50% on January 13.

When contrasting current figures with those from the same period last year, a stark decline in the issuance of second-level perpetual bonds is evident, particularly among state-owned banks

Advertisements

In the early months of 2022, a notable surge saw key institutions like Bank of China, China Construction Bank, Agricultural Bank of China, and Hengfeng Bank collectively issue seven different types of second-level capital bonds, totaling approximately 190 billion yuanState-backed banks dominated this issuance radius, with three of them accounting for the lion’s share of 180 billion yuanInterestingly, the first peak for perpetual bond issuance in 2023 is not anticipated until mid to late March, where total expected bonds from Agricultural Bank, Postal Savings Bank, and Guilin Bank could add up to about 73 billion yuan.

The critical question looms: has the slowdown in issuing perpetual bonds among state-owned banks been synonymous with a reduced demand for such financial tools? Wang Yifeng, chief analyst at Everbright Securities for the financial sector, posits that initial weak issuance numbers are largely influenced by the disruptions caused by the Spring FestivalThe fewer business days in January hindered these banks from issuing bonds, with expectations that activity may ramp up as month-end approaches.

Fitch Ratings' Director of Financial Institutions in Asia-Pacific, Xue Huiru, commented that the low issuance levels from Chinese banks over the first two months do not signify a fundamental change in demand for second-level perpetual bondsShe highlights that issuance volume is influenced by numerous interrelated factors, including each bank’s individual capital strategy, refinancing needs, and market conditions.

As this year unfolds, forecasts indicate that perpetual bond issuance may remain elevatedChief economist Mingming at CITIC Securities has highlighted that since the start of 2024, the pressure on net interest margins for banks has mitigated due to evolving regulatory frameworks, such as the implementation of the "Commercial Bank Capital Management Measures." This regulatory shift likely alleviated some capital replenishment pressures for banks going into 2025.

Despite the current slowdown, there remains a cautious optimism about the potential scale of issuance in 2025. Analysts are suggesting that the appetite for second-level perpetual bonds will persist with projections estimating net financing around 350-400 billion yuan, with total issuance figures corresponding to an expansive 15.5 to 16 trillion yuan

Advertisements

This indicates that while current participation may seem tepid, the underlying need for such financial tools is far from abated.

The data from the National Financial Supervision Administration underscores this sentiment, indicating sustained high levels of capital adequacy among commercial banks, which hovered at approximately 15.43% to 15.62% in the first three quarters of 2024. Interestingly, while large state-owned banks maintain capital adequacy ratios at 18.26%, smaller commercial banks reflect a lower average ratio of about 12.86% to 13.26%, indicating potential future demand for additional capital securities, particularly for these smaller banks.

Given this context, transitional factors such as fluctuating interest rates and the timing of approvals for bond issuances become imperativeInstitutions looking at the issuance of second-level perpetual bonds need to weigh these dynamics carefullySmaller banks display a heightened urgency for core tier-one capital due to their relatively high demand levels amid scarcity.

Online discussions also recognize the broader implications for state-owned banks, which face the dual challenge of supporting the real economy and managing declining profitability alongside refinancing needsAccording to various industry experts, it is expected that state-owned banks' perpetual bond and second-level capital bond issuance will continue at elevated levels in 2025. Concurrently, smaller banks will likely craft their issuance strategies based on an array of factors including their internal capital planning and market conditions, emphasizing a nuanced approach tailored to their specific circumstances.

Finally, a trend that will likely shape the issuance landscape is the continuing involvement of significant global banks categorized as Global Systemically Important Banks (G-SIBs). These institutions are predicted to maintain their issuance activities for Total Loss Absorbing Capacity (TLAC) non-capital bonds, prompting a pivot towards TLAC debt instruments whose repayment mechanisms are broader and often less susceptible to triggering loss absorption requirements, thereby responding effectively to capital-tool market demands.

Advertisements

Advertisements

Advertisements