Breaking News
September 7
by Kara Stanton
China is injecting about $54 billion into major state-owned banks and insurers to strengthen capital, improve financial resilience and support economic growth
Beijing is trying to bolster the country’s financial system and boost economic growth. China has launched a coordinated capital-raising program of about $54 billion or 360 billion yuan for major state-owned banks and insurance companies. The ministry-led initiative is one of China's biggest recent efforts to shore up the balance sheets of strategically important financial institutions. It includes money for big insurers and for equity placements at some of the country’s biggest banks. China Life Insurance Group will get 35 billion yuan and China Taiping Insurance Group 7 billion yuan. People’s Insurance Company of China is also planning to raise up to 15 billion yuan through a private placement of A-shares with the Ministry of Finance. The measures are not confined to the insurance sector. Agricultural Bank of China and Industrial and Commercial Bank of China are among three big state-owned banks expected to raise 290 billion yuan ($45 billion) in total through equity placements aimed at the Ministry of Finance and other state entities. The Export-Import Bank of China will also get an additional 30 billion yuan of capital. The immediate aim is to enhance the capital adequacy and risk-bearing capacity of financial institutions. Banks will mostly use the extra funds to bolster their core Tier 1 capital, giving them more headroom to lend while still maintaining higher capital buffers. The size of the package underscores the importance that Beijing places on ensuring stability across the financial landscape at a time when momentum in the domestic economy and demand for loans continue to be under pressure.
The capital program comes as Chinese banks and insurers are facing a tough operating environment. The demand for new loans is relatively weak and banks are facing more pressure on profitability, as economic growth slows and interest rate conditions remain challenging. Insurance companies face a similar but different problem. The low interest rate environment has lowered the returns on investments, leading to lower profitability and pressure on solvency ratios, especially for smaller and mid-sized insurers. So the latest government support is intended to boost the available capital and strengthen the broader resilience of the insurance industry. China’s authorities have made increasing use of large state-owned financial institutions as economic policy tools. Stronger bank balance sheets can provide lenders with additional capacity to extend financing to businesses and strategic sectors while stronger insurers can help support confidence in the financial system during periods of economic uncertainty. The latest package also comes after an earlier capital-boosting campaign targeted at China’s top state banks. The government is trying to ensure that the country's largest banks have enough capital to withstand lower domestic demand and pressure on their profits. The capital injections may boost the financial stability of the institutions involved, which would be good news for investors, but they also highlight the stress on China’s financial sector. Massive government support can help shore up balance sheets, but by itself it does not cure poor credit demand, declining profitability or other economic problems. This means that the government’s approach is both a stabilization of the financial sector and a more general attempt to support economic activity by increasing the lending capacity.
The new steps are part of Beijing’s broader aim to strengthen China’s financial system and increase the international clout of its financial institutions. The package is seen as another step in China’s efforts to turn itself into a global financial powerhouse with stronger banks and insurers expected to play a key role. The government is pumping resources into institutions that have a systemic role in the Chinese economy. Raising their capital bases allows Beijing to give big banks more room to manage risk, support lending and engage in long-term investment while adhering to regulatory capital requirements. The approach also mirrors China’s preference to deploy state-controlled financial institutions to back broader economic objectives. Big banks can channel loans to businesses and priority industries. Long-term funding and financial protection can also come from insurers. But in the end the strategy's success will hinge on whether stronger financial institutions translate into stronger economic activity. If businesses remain unwilling to borrow and households cautious about spending and investment, then new capital in the banks may not immediately lead to a big increase in credit demand. Still, the capital injection provides Beijing with more financial leeway at a time when policymakers are seeking to bolster confidence in the economy. It also signals the government's willingness to throw huge amounts of public money at stabilizing systemically important financial institutions. As such, the shift could be an important part of a broader economic strategy for China to shore up the financial sector while keeping the economy growing and enhancing the country’s role in global finance.
Kara Stanton is a U.S. finance journalist specializing in markets, investment trends, and corporate earnings analysis.
Newsflash: