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Lenders' passion for bonds on the rise

By Ding Qi (chinadaily.com.cn)
Updated: 2008-09-25 17:22

Contrary to the country's feeble stock markets, the inter-bank bond markets here are set to embrace a booming year, as more lenders turned to the field for funds to fuel their rapid growth and capital needs, the China Securities Journal reported on Thursday.

Currently, commercial banks can have a variety of debt choices including subordinated bonds, mixed capital bonds, regular financial bonds and convertible bonds. The first three kinds are issued and traded in the inter-bank market while the fourth are mainly available on the stock exchanges.

Different from the sub-prime bonds that have caused huge financial turmoil on Wall Street recently, subordinated bonds are often used to enrich banks' supplementary capital in China. Debt providers of the bonds have a subordinate status in relationship to the normal debt, but have priority of repayment against shareholders.

Due to historical burdens and business expansion, Chinese commercial banks are often strained by their capital adequacy requirements, which made subordinated bonds a welcome tool to meet the equity threshold.

Statistics quoted by the paper show Chinese banks have issued about 78.2 billion yuan ($11.45 billion) of bonds so far this year. Bond analysts believe the whole-year figure will probably surpass last year's 82.27 billion due to increasing demands from small and medium-sized banks.

The previous bond issuance peak came in the years of 2004 and 2005 when the value of bonds issued reached 81.38 billion yuan and 103.63 billion yuan, respectively. The boom was mainly attributed to large State-owned issuers including China Construction Bank, Industrial and Commercial Bank of China and Bank of China, which were thirsty for capital to finance fast-growing business and capital adequacy needs during the period.

Later, as the big names managed to get more funds from shareholders' capital injection and listing on the bourses, small and medium-sized banks began to play a bigger role in the bond market. City commercial banks and agricultural commercial banks have also joined the pool.

Banking analysts told China Securities Journal that besides raising funds, bond issuance can also lift small banks' status in the inter-bank market and help them to lower operational costs. Meanwhile, since the fund-raising capacity of the stock market has been shrinking in the recent bearish atmosphere, more banks seeking funds will find the bond market a better choice.