Fitch: China's Capital Injections Boost Support for Policy Banks, Economy
The State Administration of Foreign Exchange tapped the country's foreign exchange reserves to inject USD48bn into CDB and USD45bn into Exim in July 2015. This reinforced Fitch's view that there is an extremely high probability the two policy banks would receive central government support in the event of stress, given their full state ownership, policy-driven business profiles, and the long history of state support. Both policy banks' Issuer Default Ratings are support-driven and equalised with China's rating of 'A+'. Fitch expects both banks to become more involved in in China's "One Belt One Road" development initiative, with CDB also providing funding support to urbanisation and social housing projects in China.
Both policy banks had weak capital positions prior to the capital injections, which limited their lending capacity. Although the policy banks are not required to comply with China's regulatory requirement on capital ratios, the State Council has encouraged them to strengthen their capitalisation, which we believe will improve their financial profile and enable them to obtain external funding, if needed, to keep pace with their lending aspirations. We expect the policy banks to take on a greater role in supporting the domestic economy, especially in areas of growth where the risk-reward profile may not be attractive to commercial banks.
CDB's Core Tier 1 ratio (CET1) was 6.77% and total capital adequacy ratio (CAR) was 9.06% at end-2014. We estimate that the capital injection will increase CDB's total equity by 44% to CNY978bn and boost its CET1 and CAR by 3pp. Assuming CDB's CET1 remains above 8.5%, which is the minimum requirement for systemically important banks, the capital injection would increase CDB's lending capacity by approximately CNY1.5trn.
In addition to the capital injection, CDB received CNY1trn of funding from the PBOC in 2014 in the form of interbank borrowings to support the financing of social housing projects. CDB extended CNY1.1trn of loans for new urbanisation and urban renewal projects, and its affordable-housing loans and urban-renewal loans rose by 94% to CNY1.4trn in 2014. Its assets also increased by 26% to CNY10.3trn at end-2014.
Exim did not disclose its regulatory capital ratios, but its equity accounted for just 1.2% of total assets at end-2014. Fitch expects Exim's equity to increase to CNY307bn from CNY28bn at end-2014 after the capital injection. This would create CNY1.3trn in additional lending capacity, assuming that Exim also maintains a CET1 ratio of 8.5% and has a similar risk weighted asset structure as CDB.
If Exim deploys these funds to foreign projects with Chinese participation, this could increase demand for certain domestic industries that may have been struggling with overcapacity and faltering exports. The direct capital injection by the state is also likely to lower the cost of capital for Exim, which has up to now relied on bond issuances for foreign-currency funding. Exim lent CNY179bn to Chinese exporters in 2014, but did not disclose how much it provided in preferential loans or its NPL ratio.