China lenders rush to sell riskiest debt to catch low yields

[BEIJING] Chinese lenders are rushing to sell the riskiest kind of bank debt to capitalise on record-low funding costs.

Overall, issuance of capital bonds, including high-yielding subordinated debt, rose 23 per cent to a record 638.7 billion yuan (S$114 billion) in the second quarter, according to data compiled by Bloomberg. The average coupon on Tier-2 bonds fell to 2.35 per cent and to 2.31 per cent on perpetual debt, both the lowest since records began in 2009.

“The primary driver is low yield,” said Timothy Tan, an analyst at Bloomberg Intelligence. “Banks are locking in cheap funding amid a drop in government bond yields. They don’t expect such low yields to sustain as the economy recovers.”

Low borrowing costs come as a relief for the Chinese banking industry, which has struggled for years with rising bad loans and shrinking margins.

Chinese authorities have pushed through the mergers of hundreds of smaller, mostly rural banks, while the larger behemoths are struggling to generate profits due to record-low margins.

The overall capital adequacy ratio of China’s commercial banks stood at 15.28 per cent at the end of March, according to official data, down from 15.74 per cent at the end of 2024 but well above the required minimum.

The bond issuance is expected to taper off in the remainder of the year. The surge in the second quarter likely reflected banks’ front-loaded needs for the third quarter, said Tan.

“Depending on loan growth, new issuance in the second half is unlikely to match the second quarter’s jumbo placements,” he said. BLOOMBERG