China says it will pump $54 billion into banks and insurers — but their stocks still fell.
China’s finance ministry is leading a capital injection of 360 billion yuan ($53.6 billion) into three state lenders and five insurers. The move marks the first time Beijing has extended this kind of support to insurers, as strain in the country’s financial system spreads. Hong Kong-listed shares of the banks and insurers fell Monday, doing worse than the wider market.
The Size of the Package
The capital move was smaller in scale than markets had expected for these financial institutions, according to Citibank. “This downsized package underscores the healthier capital positions of Chinese insurers, indicating an overall lower urgency for aggressive capital replenishment.”
The Hang Seng Index fell less than 1% Monday. Agricultural Bank of China dropped 2.7%, and Industrial and Commercial Bank of China fell 2.3%. China Taiping Insurance lost almost 4%, while People’s Insurance Company of China and China Life Insurance each fell more than 2%.
What the Banks Receive
Agricultural Bank and ICBC, two of the country’s largest state banks, plan to raise up to 160 billion yuan and 100 billion yuan, respectively, through private A-share placements. The buyers include the finance ministry and China National Tobacco Corp and its subsidiaries. Proceeds will be used entirely to add to bank capital, according to their statements on Sunday.
The Export-Import Bank of China will get a direct 30 billion yuan injection from the finance ministry. The goal is to strengthen its ability to “provide funds to the real economy and withstand potential risks.”
The Insurers Get Their Share
China Life, the country’s largest life insurer, will receive 35 billion yuan. China Taiping Insurance will get 7 billion yuan. People’s Insurance plans to raise up to 15 billion yuan through a private placement of A-shares to the Ministry of Finance.
The finance ministry will also inject 10 billion yuan into China Export and Credit Insurance Corp, the state trade insurer known as Sinosure. China Reinsurance Group will raise 3 billion yuan.
Why Beijing Is Acting Now
China’s banking sector has been grinding through a multiyear margin compression, as Beijing pushes lenders to keep credit cheap for struggling borrowers. The net interest margins — the spread between what banks earn on loans and pay on deposits — fell to record lows this year.
Falling market interest rates have limited banks’ ability to rebuild capital through retained earnings, making outside support critical, said Bruce Pang, a member of the Chief Economist Forum in China. He added that the state push would strengthen lending power at large state-owned banks, allowing “higher-quality” financial support for the economy and the priority sector.
The Next Investment Cycle
Beijing is preparing lenders to finance its next strategic investment cycle, “particularly the massive capital requirements of AI and advanced technology,” said Han Shen Lin, China country director at The Asia Group. “China is effectively using state capital to strengthen the banking system’s shock absorbers.”
The capital move also gives banks room to speed up the disposal and write off of bad loans. That offsets “potential asset quality pressure down the road,” said Citibank analyst July Zhang.
“The capital pressure on China’s big banks could start easing,” Zhang said. Policymakers now prioritize quality growth and ease pressure on banks to chase fast loan growth, while credit demand remains weak.
Insurers Under Pressure
China’s insurers have seen solvency ratios deteriorate as persistently low rates squeeze profitability. The solvency ratio of the insurance sector dropped to 180.6% at the end of the second quarter, from 204.5% last year. That remains higher than the regulatory requirement of 100%.
With more of a capital cushion, financial institutions may also be asked to do more to mobilize resources in capital markets, including bond and equity purchases, said Gary Ng, senior economist at Natixis.
A Limited Economic Effect
The capital injections are likely to have “only a very limited short-term impact on the economy,” said Larry Hu, chief China economist at Macquarie. The binding constraint on bank lending is weak credit demand, rather than a lack of bank capital.
Growth has faltered further in the world’s second-largest economy into the third quarter this year. Beijing’s policy tone has shifted to acknowledging “difficulties and challenges” in the economy, a marked shift from earlier language describing growth as “better than expected,” Hu said.
The Government’s Next Steps
Fiscal support has picked up in response, with faster government bond issuance and a push toward infrastructure projects, Hu said. He does not expect a major stimulus push. “We expect policymakers to do just enough to meet this year’s growth target,” he said. “Incremental stimulus should be sufficient.”
The moves build on a 500 billion yuan capital injection into four major state banks last year. Beijing also pledged in March to issue 300 billion yuan in special treasury bonds this year to add to capital at large state lenders.
The injections arrive as Beijing seeks to foster growth with careful, limited support. Markets wanted more, and the fall in share prices showed their view.
Key Facts
- 360 billion yuan ($53.6 billion) total injection
- Three state lenders, five insurers receive funds
- Agricultural Bank: up to 160 billion yuan
- ICBC: up to 100 billion yuan
- China Life: 35 billion yuan
- China Taiping Insurance: 7 billion yuan
- People’s Insurance: up to 15 billion yuan
- Sinosure: 10 billion yuan
- China Reinsurance Group: 3 billion yuan
- Hang Seng Index fell less than 1% Monday
- Insurance solvency ratio: 180.6%, down from 204.5%
Source: cnbc.com
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