(Yicai) March 12 -- Deputies to the National People's Congress have suggested that China’s provincial governments be permitted to routinely issue special bonds to replenish capital at smaller lenders, turning a previously one-off measure into a potential long-term way to bolster their financial buffers.

Under national regulatory guidance, provincial governments should be allowed to routinely issue special-purpose bonds to top up the capital of local small and mid-size banks, Liu Ya, who is also Beijing branch president of Export-Import Bank, said at the annual meeting of China's parliament, which ends today.

China’s state-owned banks can already replenish capital through special treasury bonds issued by the central government. Following the issuance of CNY500 billion (USD72.8 billion) of bonds for this purpose last year, this year's Government Work Report proposes that a further CNY300 billion be issued in 2026.

In July 2020, China’s cabinet allowed local governments to use the proceeds of special bond sales to recapitalize smaller banks amid the uncertainties brought by the pandemic, with issuances subject to approval by the National Development and Reform Commission and the Ministry of Finance. Between 2020 and 2022, local authorities issued CNY550 billion of such notes to swell the financial buffers of smaller lenders, according to data from the People's Bank of China.

The core Tier-1 capital adequacy ratios of some city commercial banks and rural commercial banks are approaching the regulatory red line and urgently require fresh capital, Liu told Yicai. Allowing local authorities to regularly issue special bonds earmarked for bank capital would materially ease these shortfalls and support their more stable business development, Liu added.

Last year, the average CAR was 18.2 percent for large commercial banks, 13.6 percent for joint-stock banks, 12.4 percent for city banks and 13.2 percent for rural banks, according to data from the National Financial Regulatory Administration. 

Zhejiang could serve as the pilot province for permitting provincial governments to routinely issue bonds to shore up capital at smaller banks, another deputy said at a meeting of the Zhejiang delegation to the NPC. It could be done by the local government in the form of “self-review, self-issuance,” the person noted. 

The deputies' suggestion could enable local authorities to examine and issue special bonds themselves, allowing small and mid-sized lenders that urgently need capital to secure supplemental funds more quickly and flexibly, Dong Ximiao, chief economist at CMB-China Unicom Consumption Finance, said to Yicai. This would enable them to better serve local agriculture, rural areas, farmers, micro and small enterprises, and residents, he pointed out.

This approach could transform this kind of special bond financing from a one-off emergency measure into a long-term institutional arrangement, creating a durable mechanism for ongoing capital replenishment, Dong said.

After using special treasury bonds or local government special bonds to recapitalise banks, regulators must put in place routine supervision and behavioural constraints to continuously monitor banks’ operations and enable early detection and intervention for emerging risks, Dong stressed.

Editors: Tang Shihua, Martin Kadiev