(Yicai Global) June 6 -- China’s provincial governments have hurried to aid local small and mid-sized banks with funds to supplement their working capital by selling a lot more special purpose bonds in the open market this year, according to the data.

As many as nine provincial level governments raised a total of CNY113.8 billion (USD16 billion) of liquidity through special purpose government bonds in January through May, compared with CNY63 billion (USD8.9 billion) for the whole of last year.

This category of the government bond is specifically used to help unlisted local lenders who are mainly small or medium-sized urban and rural commercial banks as well as village lenders, according to the authorities’ bond sale prospectuses.

Liaoning is the largest borrower so far, as the northeastern province has already issued bonds twice, raising a total of CNY40 billion. The funds were allocated to Shengjing Bank, a major local commercial lender, and several other key rural commercial banks.

Nearby Inner Mongolia Autonomous Region and Heilongjiang province have issued CNY20 billion and CNY19 billion of special purpose bonds, respectively, while another six entities have borrowed between CNY3 billion and CNY8.4 billion (USD421.8 million and USD1.2 billion) since January.

The concentrated sale of these special purpose bonds highlights the fact that this type of state funding is becoming an important way for small and mid-sized banks -- those unlisted, with limited profitability, and a lack of other reliable funding options -- to replenish their working capital, according to a recent report released by Fitch Bohua, a unit of Fitch Ratings.

With more of the same funding expected in the third quarter, the falling capital adequacy ratio of these banks should be eased somewhat, according to Fitch Bohua.

But in the long run, the governments should promote sector-wide reforms to help lenders raise their capital quality thereby freeing them from the troubled local property market and manufacturing sector, the report added.

The ongoing reform of smaller banks, including mergers and acquisitions as well as the restructuring of rural credit systems and urban commercial banks, should provide an important way to improve lenders' risk prevention abilities, Zhu Shuning, vice president at Moody's financial institutions department, told Yicai Global.

Editors: Tang Shihua, Emmi Laine