Bank of China to Raise Tens of Billions in New Capital

Bank of China (HKG:3988) announced on Friday that it intends to raise tens of billions of dollars in new capital, the first Chinese bank to move aggressively to smooth over its balance sheet following an excessive period of lending that has questioned the long-term health of China’s banking sector.

The bank said that it would seek shareholder approval to sell new shares amounting not more than 20% of its Hong Kong and Shanghai-listed stock, which would raise about $30 billion for the bank based on last Friday’s closing prices.

The Beijing-based institution also said it would raise as much as 40 billion yuan ($6 billion US) of bonds convertible into Class A shares which are traded on China’s domestic markets.

China’s banking sector made 9.6 trillion yuan in new lending last year as a major element of Beijing’s economic stimulus package, leading to an 8.7% increase in GDP growth for the country. Although China’s economy grew based on new record levels of lending, the credit expansion has raised questions about what percentage of those loans will go bad during the years to come.

In response to those concerns, China’s banking regulator has been pushing banks to increase their capital reserves, a ratio that has been sliding downwards as banks’ lending has grown.

Many analysts have stated that Bank of China has always been the most likeliest to return to the equities market to raise additional capital, having ramped up its lending on a very aggressive basis during the first half of the year.