Sichuan to borrow $ 1.76 billion to inject into 21 small banks

Sichuan Province has joined a line of local governments to issue Special Purpose Bonds (SPBs) to raise funds to recapitalize cash-strapped small and medium banks. But how the government will perceive the reimbursement has been unclear in some cases.

The southwestern province of China will issue 11.4 billion yuan ($ 1.76 billion) of 10-year SPBs at a coupon rate of 3.5%, the provincial finance department said.

Some small and medium-sized banks, especially rural credit unions, have suffered a surge in bad debts in recent years after a rapid credit expansion left large numbers of non-performing loans in their accounts as the economic growth was slowing. The Covid-19 pandemic has exacerbated the situation as many businesses and individuals have not been able to repay their debts on time.

In response, the State Council, the Chinese government, in July 2020 authorized local government units will use funds from last year’s quota of 375 yuan SPB balls to consolidate bank balance sheets as part of measures to extend credit to micro, small and medium enterprises.

SPBs are a form of local government debt used to finance infrastructure and other public welfare projects that are commercially viable. Loans are generally repaid out of the income generated by the projects they finance. Unlike general purpose bonds, they are generally not allowed to be redeemed from government tax revenues.

The Sichuan government will inject the proceeds of the loan into 21 small and medium-sized banks. The investment will be done primarily through a form of convertible deposit, in which the government designates a company to deposit money into the bank and then the company converts the deposit into bank equity.

Ideally, the company could eventually sell the shares in the market and use the proceeds to pay off the SPBs. But the sale of bank equity depends on the ability of banks to improve their business after receiving the capital injections.

Some Sichuan recapitalization deals clearly provide for future repayment, but others do not. For example, according to an agreement with Ya’an City Commercial Bank Co. Ltd., one of the beneficiaries of the SPB funds, the local government can start selling its shares in the bank six years after the injection. If the equity cannot be sold, the government can use the bad debts and the bank’s cash to pay off the SPBs.

Bank of Zigong Co. plans to seek strategic investors to raise funds to repay SPBs. But agreements with some of the other beneficiaries only vaguely mention the commercialized transfer of capital in the future without a specific plan.

To date, the provinces of Guangdong, Shanxi, Guangxi and Inner Mongolia have issued SPBs to recapitalize banks. Among them, Guangdong has a better arrangement for the exit of the government in the future because it has found a strategic partner for each beneficiary bank.

Whether through strategic partners or convertible deposits, uncertainties still exist, said Zeng Gang, deputy director of the National Institution for Finance and Development (NIFD). Having an outside institution become the bank’s shareholder can help the bank improve its governance and increase its equity value, Zeng said.

Each bank and province has a different situation, so there is no one-size-fits-all solution, Zeng said.

Contact journalist Denise Jia ([email protected]) and editor Bob Simison ([email protected]).

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