An employee counts genuine Chinese one-hundred yuan banknotes at the Counterfeit Notes Response Center of KEB Hana Bank in Seoul, South Korea. (Photographer: SeongJoon Cho/Bloomberg)

PBOC Makes First Use of New Tool Aimed at Boosting Bank Capital

(Bloomberg) -- China’s central bank announced the first of a new kind of market operation which aims to encourage financial institutions to issue perpetual bonds to boost their capital.

The People’s Bank of China swapped 1.5 billion yuan ($223 million) of 1-year central bank bills for perpetual bonds with a coupon of 2.45 percent, according to a statement on its website Wednesday morning. The PBOC announced the new tool last month and so far, the Bank of China has issued 40 billion yuan worth of perpetual bonds.

The central bank wants more lenders to follow suit, as it sees the need for larger capital buffers. The government is already pushing them to shift informal lending back onto official balance sheets, and losses from bad debts are likely to increase as the economy slows.

The PBOC will pay attention to the sale of perpetual bonds and conduct further swap operations "prudently and smoothly," while considering reasonable market demand, the central bank said in a separate statement released Wednesday afternoon.

The operation is aimed at increasing the liquidity and market acceptance of perpetual bonds, and the PBOC’s acceptance of the debt in central bank bill swaps can also encourage financial institutions to use them as collateral in interbank operations, it said.

“There’s more work to do to refill banks’ capital through the bond market” and selling perpetual bonds is a good way to do that, PBOC Deputy Governor Pan Gongsheng said on Tuesday in Beijing.

“Compared with the 40 billion yuan perpetual bond sold by the Bank of China, the first CBS operation was only a small amount that tests the waters and more operations can be expected," said Yang Yewei, a fixed-income analyst at Southwest Securities Co. “The CBS operation has a very small impact on liquidity.”

Primary dealers will be charged a 0.25 percent fee for the operation, the PBOC said. That’s favorable and shows the central bank’s willingness to support the market, according to Yang.

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