CHINA Construction Bank Corp. (CCB) started selling 60 billion yuan (US$8.9 billion) in bonds yesterday, joining peers as they rush to replenish capital in response to tighter regulations and government calls to support a virus-hit economy.

The government has asked banks to help stabilize the world’s second-largest economy by lending to small firms and sectors which bore the brunt of COVID-19 containment measures in some of the country’s biggest cities in the last few months.

During the January-May period, subordinated bonds sold by local banks including Industrial and Commercial Bank of China (ICBC) and Bank of China (BOC) totalled nearly 400 billion yuan, a jump of 42% from the same period a year earlier, showed data from credit-rating firm Fitch Bohua.

The debt-raising spree comes as China’s monetary easing pushes down interest rates, and as capital raising via share sales is unlikely with most banks trading well below book value.

CCB will use proceeds from selling bonds via the interbank market this week to supplement its so-called Tier 2 capital. The lender will sell an additional 60 billion yuan worth of such bonds by the end of 2023, exchange filings showed.

Separately, CCB also plans to sell up to 100 billion yuan worth of perpetual bonds in China to replenish capital, and as much as US$3 billion worth of additional debt in overseas markets.

The surge in bond issuance signals that “commercial banks are preparing and making an effort to stabilize capital adequacy,” said Li Peng, associate director of banks at Fitch Bohua, who expects loans to expand in the second half of 2022.

For big banks, the capital raising also comes as they face tougher capital rules to absorb losses and head off financial instability.

China has demanded its four biggest lenders — ICBC, CCB, BOC and Agricultural Bank of China — meet specific total loss-absorbing capacity targets from 2025.

The four big banks face a capital gap of at least 3.5 trillion yuan in the next few years, French bank Natixis estimated.

Small banks, many of which have limited access to capital markets or even depositors, are staring at even tougher capital challenges at a time when the economy has slowed down, threatening asset quality.

Concern over profitability has pushed bank shares to roughly half of their book value on average.

Capital ratios of Chinese banks are above regulatory limits, but they suffer from inadequate capital generation.

(SD-Agencies)