China Construction Bank said on Monday it is to issue the first group of 10 billion yuan (US$1.2 billion) in 10-year subordinated debt on the inter-bank bond market from August 2.
The issuance is just part of the up to 40 billion yuan (US$4.8 billion) of such bonds the bank plans to issue to replenish its capital base ahead of a planned initial public offering.
"Half of that 10 billion yuan (US$1.2 billion) will comprise bonds based on a fixed coupon, while the other half would carry a floating rate," the bank said.
But the bank reserved the option to expand that to 15 billion yuan (US$1.8 billion) in line with demand from investors.
The State Council agreed last month that China Construction Bank and Bank of China can issue subordinated debt. The bonds rank after other bank liabilities in terms of claims on bank assets.
The Bank of China sold 14.07 billion yuan (US$1.7 billion) worth of subordinated bonds on the inter-bank bond market last week. The 10-year bonds carry an annual coupon of 4.87 percent set after a public tender.
China Construction Bank, which bought 3.7 billion yuan (US$445 million) worth of the bonds, was the largest single buyer of the issuance.
Dong Chen, a senior analyst with China Securities, said Chinese commercial banks, especially the big-four State-owned banks, need to issue subordinated debts to fuel their future growth.
The commercial banks will have to sharpen their competitive edge before foreign banks enter the Chinese market without restrictions before the end of 2006, he said.
"They will have to lower the rate of non-performing loans, get rid of historical financial burdens and raise their capital adequacy to international standards," he said.
The country's commercial bank law stipulates that commercial banks' capital adequacy ratio will have to reach 8 percent, the minimum required by the Basel Capital Accord reached by international banking managers.
"This means China's commercial banks, especially the State-owned banks, will have to achieve the goal before they get listed," Dong said.
The China Construction Bank and the Bank of China, which won a US$45 billion bail-out from the government in late December, were chosen by the central government as a pilot project to turn them into joint stock banks.
Early last month, China Construction Bank was approved by relevant government departments to be split into two -- a company group and a shareholding company.
The shareholding company -- China Construction Bank Corporation -- is to be ready for a stock listing.
China Construction Bank Corporation will continue to operate the bank's commercial banking business including its domestic and foreign currency deposits, loans, banking cards and clearance.
The business names, trademarks, Internet domain names and service call numbers of China Construction Bank and its branches will remain unchanged and will continue to be used by China Construction Bank Corporation.
China Construction Bank Group Inc is a shareholder of China Construction Bank Corporation and will not operate the commercial banking business.
According to President Zhang Enzhao, China Construction Bank will usher in foreign company investors as its equity owners.
The introduction of foreign companies as strategic investors is beneficial for increasing capital strength, optimizing capital structure and diversifying the ownership of China Construction Bank, he said.
"Our goal is to establish a modern shareholding commercial bank that will make us a competitive heavyweight in the global financial market," he said.
During the first quarter, the bank earned 15.97 billion yuan (US$1.9 billion) in operating profits, an increase of 32.4 percent from a year ago.
By the end of March, the bank's non-performing loan ratio, by the international standard, was 8.77 percent, a drop of 0.35 of a percentage point compared with the beginning of the year.
(China Daily July 13, 2004)
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