China’s Largest Banks Plan to Raise $71.6 Billion to Boost Capital Amid Economic Struggles

The National People’s Congress, China’s top legislature, approved the issue of 500 billion yuan in special government bonds to help capitalize the country’s banks.

As Beijing ramps up efforts to recapitalize the 380 trillion yuan banking industry facing a slowdown in growth, four of China’s largest state-owned banks plan to raise 520 billion yuan (US$71.6 billion) from new share sales to government-backed shareholders to restock capital.

The fundraising effort aims to increase the banks’ core Tier-1 capital after Chinese authorities promised earlier this month to recapitalize key state banks to 500 billion yuan to increase their capacity to support the real economy. One day after the announcement, the bank’s shares increased on Monday.

The four state banks stated to the Hong Kong Exchange on Sunday that China Construction Bank (CCB) intends to absorb as much as 105 billion yuan, Bank of China at least 165 billion yuan, Bank of Communications (Bocom) about 120 billion yuan, and Postal Savings Bank of China about 130 billion yuan.

According to the bank’s announcement, the finance minister will subscribe to the shares of all four banks. China Tobacco will buy Bank of Communications shares, and China Mobile will buy Postal Savings Bank’s shares. They will use the funds raised to restock tier-one banks.

The shares will be valued in yuan and traded on the Shanghai Stock Exchange after the conclusion of the five-year lock-up period.

The stock offers came after the financial regulator promised to provide capital for the country’s six largest state-owned lenders. It was when the industry faced many macroeconomic challenges, like a struggling property sector, a slowing economy, and a squeeze on net interest margins, leading to reduced loan demand and profitability challenges.

The National People’s Congress, China’s top legislature, approved the issue of 500 billion yuan in special government bonds to help capitalize the country’s banks.

CCB stated that the Ministry of Finance’s strategic investment in the banks will help maximize the use of state-owned capital, encourage a long-term recovery and expansion of the macroeconomy, improve the effectiveness of fiscal policy transmission, strengthen how the national strategies get implemented through capital use, fulfill the role of state-owned capital to help in serving national development and people’s well-being.

Bank of China will raise 27.3 billion shares at 6.05 yuan each. CCB plans to provide 11.3 billion shares at 9.27 yuan each. Bocom will offer 13.8 billion shares at 8.71 yuan.  

The finance minister will purchase about 12.9 billion shares, and China Tobacco and its wholly owned subsidiary, Shuangwei Investment, will buy the remaining shares.

Postal Savings Bank will offer 20.6 billion shares at 6.32 yuan. The finance ministry will purchase 18.6 billion shares. China Mobile and China State Shipbuilding Corp will buy the remaining shares.

The stock flotation makes up about 30% of each bank’s total outstanding shares.

The offer prices have been calculated based on a 20% reduction in the average closing prices over the past 20 trading days. All the sales have been undertaken only with the shareholders’ consent.

China’s biggest banks have reported flat annual profits and reduced margins due to a slowing economy and struggling real estate market.

Analysts advised the Chinese government to quickly capitalize on the country’s major banks to help them increase their lending to manage asset quality strains and reinvigorate sluggish development.

Chinese banks, whose profitability has already been under pressure due to the economic recession and prolonged real estate market crisis, are expected to be further impacted by potential rate cuts to key interest rates.

Since the government has promised to provide more budgetary resources to help fight deflationary pressures and offset the effects of US tariffs, China has set its economic growth target for this year at about 5%, which is unchanged from last year.

China’s six state-owned banks have reported modest profit increases, and the non-performing loan ratio decreased somewhat last year.

CCB’s net income increased by about 1%, whilst Bank of China’s increased by 2.6%. Bocom’s and Postal Savings Bank’s profits were constant.