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Moody's: China's expansion of banks' capital-raising toolkit is credit positive

The Chinese financial regulators' recently announced policy to develop new debt instruments for capital and loss-absorbing capacity is credit positive for commercial banks, their depositors and senior creditors, Moody's said.

The rating agency said March 19 that the policy, which was jointly issued by China's financial regulators, will aid banks in addressing their need for more capital amid their constrained ability to generate capital internally.

The policy will also address higher regulatory capital requirements due to the full phase-in of the capital conservation buffer in 2018, as well as the shift of credit to loans from lightly capitalized shadow-banking activities, the rating agency added.

The new guidelines reinforced regulatory emphasis on the development of contractual capital instruments, including perpetual bonds, Tier 2 capital instruments with equity-conversion features, and capital bonds with a fixed date of conversion to equity. The policy also aims to develop total loss-absorbing capacity debt instruments by changing regulations and amending laws if necessary.

The policy's suggestion to streamline the approval process for banks' capital instruments by using a shelf registration with a one-time approval of an issuance quota will facilitate better planning and management of capital by banks, Moody's said.

Given the recently announced consolidation of responsibilities of various Chinese regulators, the rating agency said it expects the coordinated nature of financial policymaking to enhance supervision of bank capital and loss-absorbing capacity in order to safeguard financial stability.