Chinese Bank Perpetual Bond Sales Boosted by Hunt for Yields

(Bloomberg) -- The global hunt for yield is a boon for Chinese banks raising capital via perpetual bonds.

Agricultural Bank of China Ltd. sold 85 billion yuan ($12 billion) of perpetual bonds last week at a coupon of 4.39%, the lowest level since lenders first started selling the debt instruments in January. Total sales of the bonds, which lack a maturity date, now amount to 315 billion yuan. Postal Savings Bank of China Co. said Tuesday it plans to sell such debt totaling as much as 80 billion yuan or equivalent in foreign currencies.

“Due to declining risk-free interest rates, coupled with supportive policies for bank perpetuals, most issues were oversubscribed, which shows a robust market demand,” said Yu Liang, an analyst at S&P Global Ratings. She said issuance will top 1 trillion yuan soon.

Average coupons on offer on bank perpetuals sold so far is about 4.63%, compared with about 3% for China’s 10-year sovereign bond yield.

Bulking up on capital is a pressing need for Chinese banks as they grapple with rising bad debt while being pushed to help the government achieve its economic growth target. The People’s Bank of China in January introduced a swap program designed to make perpetual bonds more liquid in secondary trading to increase its appeal among buyers.

Read: China to Do More to Help Perpetual Bond Sales, PBOC’s Pan Says

The central bank may expand the size of the swap program, while officials may take measures to attract more investors, Yu said.

Here are some more analyst comments:

• Yu Liang, an analyst from S&P Global:
  • The central bank may expand the size of the swap program, and policy makers will take measures to attract more investors to this market
  • Banks are main buyers of this tool but insurance companies are also showing an interest because it matches their long-term liabilities
  • Most bank perpetuals are added to wealth management portfolios issued by other banks, and there are concerns on mitigating losses suffered by individuals
• Tan Songheng, analyst from Hunan Sanxiang Bank Co.
  • The supply of bank perpetuals is likely to grow as Chinese regulators continue to encourage commercial lenders to raise core capital, especially after the liquidity crunch caused by a seizure of a regional bank
  • Some perpetuals have changed hands in the secondary market, in a sign that liquidity condition has improved, and the supportive measures by the central bank have started to take hold

--With assistance from Matt Turner.

To contact Bloomberg News staff for this story: Tongjian Dong in Shanghai at tdong28@bloomberg.net;Wenjin Lv in Shanghai at wlv8@bloomberg.net;Yuling Yang in Beijing at yyang329@bloomberg.net

To contact the editors responsible for this story: Neha D'silva at ndsilva1@bloomberg.net, Chan Tien Hin

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With assistance from Bloomberg