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China's finance ministry is leading a smaller-than-expected $54 billion capital injection into state-owned banks and insurers, as Beijing seeks to foster growth with restrained stimulus. Three state lenders and five insurers will get a combined 360 billion yuan ($53.6 billion) from state institutions, led by the Ministry of Finance and the country's tobacco giant. It's the first time that Beijing has extended recapitalization to insurers, as stress in the country's financial system spreads. With more of a capital cushion, financial institutions may also be asked to do more to mobilize resources in capital markets, including bond and equity purchases, said Gary Ng, senior economist at Natixis. The recapitalization was smaller in scale than markets had anticipated for these financial institutions, according to Citibank. "This downsized package underscores the healthier capital positions of Chinese insurers, indicating an overall lower urgency for aggressive capital replenishment." Hong Kong-listed shares of the banks and insurers slumped Monday, underperforming the broader market. The Hang Seng Index fell less than 1%, while Agricultural Bank of China and Industrial and Commercial Bank of China dropped 2.7% and 2.3%, respectively. China Taiping Insurance lost almost 4%, while People's Insurance Company of China and China Life Insurance each fell more than 2%. The moves build on a 500 billion yuan capital injection into four major state banks last year and a pledge in March to issue 300 billion yuan in special treasury bonds this year to replenish capital at large state lenders. China's banking sector has been grinding through a multiyear margin compression, as Beijing pushes lenders to keep credit cheap for struggling borrowers. The net interest margins — the spread between what banks earn on loans and pay on deposits — fell to record lows this year. Beijing is preparing lenders to finance its next strategic investment cycle, "particularly the massive capital requirements of AI and advanced technology," said Han Shen Lin, China country director at The Asia Group. "China is effectively using state capital to strengthen the banking system's shock absorbers." Injection details Agricultural Bank and ICBC, two of the country's largest state banks, plan to raise up to 160 billion yuan and 100 billion yuan, respectively, through private A-share placements to a group of institutions, including the finance ministry, and China National Tobacco Corp and its subsidiaries. Proceeds will be used entirely to replenish capital, according to their statements on Sunday. The Export-Import Bank of China will get a direct 30 billion yuan injection from the finance ministry, aimed at strengthening its ability to "provide funds to the real economy and withstand potential risks." China Life, the country's largest life insurer, will receive 35 billion yuan, while China Taiping Insurance will get 7 billion yuan. People's Insurance plans to raise up to 15 billion yuan through a private placement of A-shares to the Ministry of Finance. The finance ministry will also inject 10 billion yuan into China Export and Credit Insurance Corp, the state trade insurer known as Sinosure, while China Reinsurance Group will raise 3 billion yuan. Falling market interest rates have limited banks' ability to rebuild capital through retained earnings, making external injections critical, said Bruce Pang, a member of the Chief Economist Forum in China, adding that the state push would strengthen lending power at large state-owned banks, allowing "higher-quality" financial support for the economy and the priority sector. The recapitalization also gives banks room to accelerate the disposal and write off of non-performing loans, offsetting "potential asset quality pressure down the road," said Citibank analyst July Zhang. "The capital pressure on China's big banks could start easing," Zhang said, as policymakers prioritize quality growth and ease pressure on banks to chase fast loan growth, while credit demand remains weak. China's insurers have seen solvency ratios deteriorate as persistently low rates squeeze profitability. The solvency ratio of the insurance sector dropped to 180.6% at the end of the second quarter, from 204.5% last year, though higher than the regulatory requirement of 100%. Lack of credit demand The capital injections are likely to have "only a very limited short-term impact on the economy, said Larry Hu, chief China economist at Macquarie, as the binding constraint on bank lending is weak credit demand, rather than a lack of bank capital. Growth has faltered further in the world's second-largest economy into the third quarter this year. Beijing's policy tone has shifted to acknowledging "difficulties and challenges" in the economy, a marked shift from earlier language describing growth as "better than expected," Hu said. Fiscal support has picked up in response, with faster government bond issuance and a push toward the infrastructure projects, Hu said. But he doesn't expect a major stimulus push. "We expect policymakers to do just enough to meet this year's growth target," he said. "Incremental stimulus should be sufficient."
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