Regulator clears bids to raise capital

PUBLISHED : Wednesday, 27 July, 2011, 12:00am
UPDATED : Wednesday, 27 July, 2011, 12:00am


The nation's banking regulator said in a draft guideline this week that banks' major shareholders should not prevent any move to raise capital.

'The China Banking Regulatory Commission has always had great power over the banks. Only this time, they're putting the orders down in black and white,' said Michael Werner, an analyst at Sanford C. Bernstein. 'The article could also be interpreted as, 'banks should not be hindered from raising capital even if some shareholders are not happy'.'

In theory, the CBRC does not have the authority to tell shareholders what to do, said Liu Ligang, head of China economics at ANZ Bank. But the notice was directed more towards smaller banks and could present an opportunity for private enterprises, Liu added.

'Usually the major shareholders of smaller banks are local governments and the guideline might be a way of asking government shareholders not to block social funding, such as private enterprises,' said Liu.

The notice comes amid market concerns about the health of mainland banks. Many are burdened with bad loans after being forced to extend credit to dubious projects backed by local governments under Beijing's economic stimulus programme in the aftermath of the global financial crisis.

Estimates of the value of non-performing loans sloshing around the mainland banking sector vary, but researchers at Standard Chartered say it could be as high as 6 trillion yuan (HK$7.25 trillion).

The People's Bank of China says total bank loans to local governments reached 14.4 trillion yuan. The seven largest mainland banks listed in Hong Kong raised a total of 940 billion yuan through IPOs and rights issues on the mainland and in Hong Kong between 2005 and 2010, according to Sanford C. Bernstein.

So far this year, 14 mainland banks have announced plans to raise a combined 460 billion yuan in the stock and debt markets.

Like ANZ's Liu, Werner believes the guideline is aimed more at small banks, which might find it difficult to meet capital adequacy standards or even face bankruptcy if they fail to raise money.

'China does not have a bankruptcy law for banks at this point,' said Werner. 'This notice, along with the fact that the CBRC is starting to draft bankruptcy regulations, could be interpreted as a prelude to setting out standards in an area that has been seriously lacking for the past 30 years.'

The guideline also says shareholders should allow banks to cut or suspend dividend payments if they are unable to raise capital levels to meet the minimum requirement.

The rules would mainly apply to shareholders who control more than 5 per cent of shares or voting rights and those that can exert 'major influence' on the banks' decisions.

The CBRC said it would accept feedback on the proposed rules until August 25.