Bank of China’s announcement that it is to raise 40 billion yuan ($5.8 billion) of new capital through a convertible bond issue is the latest example of the authorities moving to sop up the stimulus-feed liquidity slopping around the economy. The big state-owned banks have to told to get back in line with their minimum capital requirements after last year’s 9.5 trillion yuan lending spree (with Bank of China at the forefront). They have also been told to rein in new lending, a message repeated again last week after previous strictures apparently fell on deaf ears and an estimated 1 trillion yuan was lent out in the first two weeks of this month. Regulators are worried by the risk of lending fueled property and stock bubbles going pop, nascent signs of inflation and the possibility of banks being left with bad loans on their books (and they have seen in America what happens when that occurs).
At the end of September, Bank of China says, its capital adequacy ratio was 11.63%. As it needs an estimated 140 billion yuan over the next two years to maintain the required 12% ratio, this may not be its last capital raising exercise. And expect the other big state-owned banks to follow suit.
China Bystander 