China's Top Banks to Sell $8.3 Billion in TLAC Bonds

Industrial & Commercial Bank of China and Bank of China will sell 60 billion yuan in total loss-absorbing capacity bonds starting this week. The bond sales aim to replenish capital and support China's economy, marking the first such debt issuances by Chinese lenders.

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China's Top Banks to Sell $8.3 Billion in TLAC Bonds

China's Top Banks to Sell $8.3 Billion in TLAC Bonds

Industrial & Commercial Bank of China Ltd. (ICBC) and Bank of China Ltd. (BOC), two of China's largest state-owned banks, are set to sell a combined 60 billion yuan ($8.3 billion) in total loss-absorbing capacity (TLAC) bonds starting this week. The bond sales mark the first such debt issuances by Chinese lenders aimed at replenishing capital and supporting the growth of the world's second-largest economy.

Why this matters: This move is significant as it indicates China's commitment to implementing the Basel III regulatory framework, which aims to strengthen banks' capital buffers and reduce systemic risk. The success of these bond sales will have implications for the stability of China's financial system and its ability to support economic growth.

ICBC will sell 30 billion yuan TLAC bonds in two tranches from Wednesday to Friday, consisting of 20 billion yuan in four-year bonds with conditional redemption at the end of three years, and 10 billion yuan in six-year bonds with conditional redemption at the end of five years. BOC will also sell 30 billion yuan TLAC bonds from Thursday to Monday. The proceeds will be used to improve the banks' total loss-absorbing capacity but will not be counted in their capital base.

The issuance of TLAC bonds is part of China's efforts to implement the Basel III regulatory framework, which aims to strengthen banks' capital buffers and reduce systemic risk. As global systemically important banks (G-SIBs), China's big five state-owned lenders, including ICBC and BOC, are required to have liabilities and instruments available to "bail in" the equivalent of at least 16% of risk-weighted assets by January 1, 2025, rising to 18% by 2028.

Fitch Ratings estimates that China's five G-SIBs could issue around 1.6 trillion yuan in capital instruments and TLAC-eligible senior debt by January 2025 and around 6.2 trillion yuan by January 2028. The move comes as Chinese lenders face growing pressure to raise capital to support the economy, property developers, and local government financing vehicles amid the country's economic challenges, including a slowing economy and rising debt levels.

The bond market is adjusting in response to the anticipated TLAC issuances and potential monetary easing by the People's Bank of China, with mid-term securities becoming increasingly attractive. Yields on ten- and thirty-year bonds have dropped to their lowest levels since at least 2005, suggesting an environment conducive to lower interest rates.

Key Takeaways

  • ICBC and BOC to issue 60 billion yuan ($8.3 billion) in TLAC bonds to replenish capital.
  • First TLAC bond sales by Chinese lenders to support economic growth and implement Basel III.
  • Proceeds will improve banks' total loss-absorbing capacity, but not count in capital base.
  • China's big five state-owned lenders required to have 16% TLAC by 2025, 18% by 2028.
  • Fitch estimates 1.6 trillion yuan in TLAC issuances by 2025, 6.2 trillion yuan by 2028.