Chinese banks received a draft ruling that would require them to deduct existing subordinated and hybrid debt sold by other lenders from supplementary capital. In addition, the new rules would limit the amount of hybrid and subordinated debt held by a single bank to 15% of core capital (and 20% for all banks in total).
The banks have been given until the 25 August to provide their feedback on the issue to the China Banking Regulatory Commission.
The upshot maybe to increase minimum capital adequacy ratios by reducing lending, or increasing capital by selling more shares to the market. In fact, the regulator has asked small banks to increase their CAR to 12% (from 10%).
Chinese stocks have stuttered as investors are concerned that such a move would curtail loan growth. A significant portion of Chinese growth has been driven by increased lending and stimulus spending, in an attempt to plug the export hole.
In my opinion the commission is correct in focusing on ‘main-street’ and crafting a path of more sustainable growth, ensuring that asset bubbles are contained, and non-performing loans are kept to a minimum. In this case the stock market should clearly play second fiddle.