(Yicai Global) Aug. 12 – About 11 provincial governments already issued a total of CNY112.2 billion（USD 16 billion）special bond to support small and medium-sized banks this year, according to Yicai Global’s incomplete statistics.

The group has widened after Tianjin and the Inner Mongolia Autonomous Region recently released their issuance plans. Last November, the State Council approved the quota of CNY200 billion in special bonds to help keep small and medium-sized banks afloat. 

Big Helpers

Inner Mongolia has issued four bonds totaling CNY16.2 billion (USD2.5 billion), the biggest sum among the 11 regions. Shanxi, Heilongjiang, Guangxi, Sichuan, Guangdong, and Liaoning provinces each have spent over CNY10 billion.

Most of the debt instruments expire in 10 years and they are mainly used to replenish unlisted lenders' capital adequacy ratios. 

"These banks are usually weak and have a low operating efficiency and credit quality as well as narrow financing channels," said Wu Zhiwu at credit rating agency CSCI Pengyuan. "Special bonds provide the banks with new channels to supplement capital and thus relieve their pressures.”

However, some of the lenders are listed such as two Hong Kong-listed banks headquartered in eastern China's Jiangxi province. Earlier this year, Jiangxi Bank said it will apply up to CNY3.9 billion worth of special bonds while Bank of Jiujiang seeks CNY2 billion to supplement tier-one capital.

Payback 

These types of special bonds can be executed in two ways. Financial holding firms under local governments can directly inject the funds into banks. The second option is the so-called "equity transfer agreement deposits" which involve convertible bonds that regional governments can convert into shares if certain conditions are met.

But it is uncertain whether investors can redeem the deposits. Equity transfer is the main approach of recovering funds but the process is not necessarily smooth, said Wu.

Most of the targeted banks are unlisted with complicated equity structures and unattractive liquidity, so it would be difficult to transfer equity in them, a banking analyst said to Yicai Global.

Moreover, there are other risks that may hinder bond repayments. It will be hard for banks to pay back if the withdrawal causes their tier-one capital adequacy ratio to drop below a certain threshold, the analyst added.

Editor: Tang Shihua, Emmi Laine