In recent years, the bond market has experienced a significant downtrend in interest rates, spurring a frenzied wave of capital-raising activities from various financial institutions, including banks and insurance companies.

Statistics indicate that the issuance scale of subordinate bonds by commercial banks is expected to approach 19 trillion yuan by 2024. More specifically, the combined total of Tier 2 capital bonds and perpetual bonds—often referred to as "perpetual Tier 2 bonds"—is forecast to reach approximately 16.7 trillion yuan, setting a historical record.

Several analysts have pointed out that in the current market environment, bond issuance has evolved into a vital financing avenue for publicly listed companies

The persistent decline in interest rates in the bond market has led to lower financing costs, further accelerating the pace at which banks and insurance firms are issuing bonds.

Significant Surge in Bank "Perpetual Tier 2 Bonds"

In response to a robust demand for capital replenishment, the issuance of "perpetual Tier 2 bonds" by commercial banks in 2024 is set to approach 16.7 trillion yuan, considerably exceeding the issuance levels of 2022 and 2023.

Data reveals that in 2024, 143 commercial banks' perpetual Tier 2 bonds are expected to be issued, totaling 16,662.9 billion yuan, which showcases a significant increase compared to the 11,157.9 billion yuan issued in 2023 and the 11,941.55 billion yuan from the previous year

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This total includes 9,615.90 billion yuan in Tier 2 capital bonds and 7,047 billion yuan in perpetual bonds.

Addressing the factors behind the substantial growth in "perpetual Tier 2 bond" issuance in 2024, Xue Huiru, the Director of Financial Institution Ratings at Fitch Ratings’ Asia-Pacific division, explained that Chinese banks, notably the five global systemically important banks, are actively leveraging the issuance of these capital instruments to meet capital requirements for a few reasonsFirst, banks are compelled to maintain certain scales of expansion or support the loan restructures in specific industries to reinforce the real economy, which consequently boosts their risk-weighted asset growth rates

However, the pressure on profitability curtails their capacity to accumulate internal capital, thereby intensifying capital stress.

Second, capital demands on major banks continue to rise incrementally; for instance, the external total loss-absorbing capacity (TLAC) risk-weighted ratio for China's five global systemic banks is set to reach 16% by January 2025 and climb to 18% by January 2028. Lastly, refinancing demands are further amplifying the capital pressure on these financial institutionsThe total refinancing scale for capital instruments issued from 2019 to 2022 is approximately 1.3 trillion yuan annually, and they will start maturing in 2024, heightening the demand for capital issuance among Chinese banks.

Capital serves as the lifeline for banks

Through prudent capital replenishment, it aids in enhancing their risks absorption capabilities as well as expanding their lending capacitiesZhou Maohua, a macro researcher at China Everbright Bank’s financial markets department, emphasized in an interview that banks currently face extraordinarily challenging operational environments due to persistent profit-sharing with the real economy, resulting in a decline in their organic capital replenishment abilities and necessitating an increase in external capital support.

Notably, the ongoing downtrend in bond market interest rates has significantly bolstered commercial banks' willingness to issue bondsYao Xusheng, a financial planner at Paipai Wang Wealth Management, pointed out that the continued decrease in bond market interest rates in 2024 encourages banks to issue "perpetual Tier 2 bonds" as a cost-saving measure, alleviating pressures from narrowed net interest margins

Additionally, 2024 marks the first redemption period since the inception of perpetual bonds for commercial banks, creating a need to reissue "perpetual Tier 2 bonds" to substitute for maturing bonds to maintain adequate capital adequacy ratios.

Insurance Companies with Record Bond Issuance

The ongoing low-interest environment and weak market demand have tested insurance companies' abilities to boost their capital adequacy ratiosAs a result, insurance firms are also proactively engaging in bond issuance to bolster their financial standing.

According to statistics, in 2024, insurance companies are set to issue a total of 17 bonds, raking in a record-high issuance scale of 1,175 billion yuan

Leading insurers have taken the initiative in serving as the primary contributors to this issuance; for instance, China Life has issued capital replenishment bonds amounting to 35 billion yuan, marking the largest single issuance by an insurance company in 2024. Other significant firms like Ping An Life, PICC Property and Casualty, New China Life, and Ping An Property and Casualty have also issued bonds each worth over 10 billion yuan.

In terms of the types of bonds issued by insurance companies, the majority have been capital replenishment bonds and perpetual bondsWith regards to the reasons behind the sustained large-scale bond issuance by insurance firms, Wang Changtai, the Senior Director of Non-Bank Financial Institution Ratings at Fitch Ratings for the Asia-Pacific region, mentioned that volatility in capital markets, ongoing low-interest rates, and subdued insurance demand have constricted the capability of insurers to increase their solvency ratios over the past two years

Additionally, since January 1, 2022, the regulatory body has revised the calculation definitions for core capital under the second phase of the China Risk-Oriented Solvency System (C-ROSS), leading to a widespread decline in core solvency ratios for life insurance companies after the implementation of this second phase.

Consequently, some insurers with weaker solvency buffers or strong growth incentives are seeking to enhance their comprehensive or core solvency adequacy through the issuance of capital-replenishment bonds or perpetual bonds.

In contrast, for brokers, the issuance of bonds in 2024 has shown a decline

According to data from Wind, the scale of bonds issued by domestic brokerage firms is anticipated to fall to 1.31 trillion yuan in 2024, a decrease of about 190 billion yuan compared to 1.50 trillion yuan in 2023.

He Jinlong, General Manager of Youmeili Investment, attributes this shrinkage in bond issuance by brokerages to several factors, including the consolidation of capital markets leading to fewer initial public offerings (IPOs) and refinancing activities, coupled with a decline in brokerage business, which lowers the need for capital replenishmentOn the other hand, despite the decreasing cost of financing in a low-interest-rate environment, related businesses may not generate returns sufficient to cover financing costs

Furthermore, following a period of intensive bond issuance, brokerages may find their debt levels to be considerable, and any continued issuance would exacerbate their debt burdenLastly, the need to comply with regulatory requirements concerning capital adequacy, along with the absence of policy stimuli, dampens the motivation to issue new bonds, contributing further to the reductions in their issuance scales.

Financial Institutions to Maintain High Levels of Bond Issuance

Given the current market conditions, many institutions are projecting that the capital replenishment pressures on banks will ease in 2025, while the scale of bond issuance by insurance companies is expected to remain elevated.

"In 2025, the issuance of 'perpetual Tier 2 bonds' by commercial banks is projected to remain stable, although the motivation for state-owned banks to issue these bonds may diminish

Conversely, joint-stock banks and city commercial banks are likely to have a stronger demand for issuing additional 'perpetual Tier 2 bonds' due to their relatively low capital adequacy ratios," Yao Xusheng explained.

The persistently low interest rates and weak market demand will continue to pose challenges for insurance companies' abilities to enhance their capital adequacy ratios in 2025. Regarding the bond issuance situation of insurance firms in 2025, Wang Changtai anticipates that some companies with higher growth or weaker profitability will likely continue issuing capital-recognized debt to bolster their solvency levelsInsurers primarily focused on selling long-term life insurance policies may find it essential to issue perpetual bonds in 2025 to support their core capital levels in light of their continual business growth.

Yao Xusheng also suggested that the scale of bond issuance by insurance companies in 2025 remains likely to continue surpassing 100 billion yuan, especially in the low-interest-rate climate, as they see a persisting strong demand for debt financing to augment their capital needs

The issuance scale of perpetual bonds is expected to increase further, becoming an important tool for insurance companies to supplement their core Tier 2 capital.

Regarding brokerages, Zhang Rongrong, Director of Non-Bank Financial Institution Ratings at Fitch Ratings for the Greater China region, predicts that the bond issuance scale among them in 2025 will largely depend on their growth needsSustained economic growth in China is expected to affect investors' confidence in capital marketsMoreover, the effectiveness of government initiatives aimed at revitalizing the economy and stimulating the capital markets will influence the growth prospects of brokerage firms and their demand for capital.