To support the struggling economy, Chinese regulators have been encouraging banks to issue more perpetual bonds to shore up their capital.

More Chinese banks are issuing perpetual bonds to boost capital and support their loan growth, with regulatory incentives spurring RMB569.6 billion yuan ($79.6 billion) in total issuance during 2019 for one of the most risky forms of bank debt, the South China Morning Post reported.

But risks have become more severe because an increasing number of unlisted city and rural lenders are issuing perpetual bonds this year. Issuance in China last year already exceeded all perpetual bonds issued by European banks in the three years of 2016 to 2018 combined, at €70.59 ($77.92 billion), according to data from S&P Global Market Intelligence.

Such data, when set against the disruption caused by COVID-19, highlights fissures in the domestic Chinese financial system of a kind that may keep Beijing’s policymakers awake at night. For some time, rating agencies and other groups have warned about the vulnerability of wealth management products and other investments in China. 

Perpetual bonds are entities whose investors are first to be hit if banks encounter trouble. Investors can lose all their principal if regulators deem the bank non-viable.

The SCMP article noted that the vulnerable nature of such debt was highlighted recently, when Bank of Huzhou issued an RMB1.2 billion perpetual bond at a 4.7 per cent coupon. The unlisted bank is the smallest bank in Zhejiang province, with RMB52 billion in assets. But prior to its bond issuance, the Chinese banking regulator and foreign exchange control regulator had fined the bank for fund misappropriation and failing certain reporting obligations, raising questions about the bank’s governance.

To support the struggling economy, Chinese regulators have been encouraging banks to issue more perpetual bonds to shore up their capital, the article added.