PBoC makes 1st use of new tool to boost bank capital

HONG KONG • 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 (PBoC) swapped 1.5 billion yuan (RM948.51 million) of one-year central bank bills for perpetual bonds with a coupon of 2.45%, according to a statement on its website yesterday 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 yesterday 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.

Primary dealers will be charged a 0.25% fee for the operation, the PBoC said. That’s favourable and shows the central bank’s willingness to support the market, according to Southwest Securities Co analyst Yang Yewei. — Bloomberg