Huaxia Bank said Wednesday it had received approval from the China Banking Regulatory Commission (CBRC) for a bond issue plan aimed at boosting its capital adequacy level.

But the bank, China's 11th largest lender, did not give a timetable for the 4.25 billion yuan (US$512 million) offer of subordinated bonds it announced earlier this year.

The six-year bonds will carry an annual coupon of 4.5 percent, close to the same type of bonds its peer banks issued earlier this year after regulators allowed banks to calculate proceeds from subordinated bonds as non-core capital.

Subordinated bonds rank behind other liabilities in terms of claims on bank assets.

Analysts said the bond issue will be an efficient way to help the bank raise its capital adequacy ratio, and will have a positive effect on its shares listed in the Shanghai Stock Exchange despite negative factors like the higher borrowing costs relative to deposits.

"Overall, it will be a plus for the share price," said Yang Qingli, an analyst with CITIC Securities.

Like other Chinese banks, the Huaxia Bank faces pressures to raise capital adequacy levels to meet regulatory requirements and as a result of quick asset expansion.

Investors injected an additional 800 million yuan (US$96 million) of capital into the bank in 2002 to bring its capital adequacy ratio up to initial public offering requirements. It raised 5.4 billion yuan (US$650 million) from the share offer late last year.

A bond issue will help the bank not only meet the minimum 8 percent capital requirement, but raise funds without putting more pressure on an already bearish stock market, bank officials said after the plan was announced in January this year.

Huaxia Bank's capital adequacy ratio stood at 10.32 percent at the end of last year, according to its 2003 annual report.

The bank has said the bonds will be sold to insurance companies, which have been the major buyers of such bonds issued by other Chinese banks.

A few joint-stock commercial banks, including Industrial Bank and China Merchants Bank, have already issued subordinated bonds this year. More have indicated plans to do so, including the State-owned lenders of China Construction Bank and Bank of China.

Analysts said insurance companies chose subordinated bonds for their relatively high yield and low risk level as compared to other corporate bonds, especially when their premium incomes keep growing rapidly.

China's total insurance premiums jumped by 27.1 percent on a year-on-year basis to 388 billion yuan (US$46.7 billion) last year. But insurance firms are limited to investing only in bank deposits, government and corporate bonds while barred from trading stocks directly.

(China Daily July 8, 2004)