Caixin learned that Construction Bank will issue CNY 50 billion ($7.13 billion) of total loss-absorbing capacity (TLAC) non-capital bonds on the interbank market, the third such offerer this year. The Agricultural Bank of China also got approval for its TLAC non-capital bond of CNY 50 billion in late July.

Experts told Caixin that the issuance of TLAC bonds will help solidify the systemic importance of large banks, support their risk management capabilities, and ensure their loss absorption capacity as they keep channeling credit to the real economy, pushing credit expansion on a larger scale.

Construction Bank is to issue up to CNY 50bn ($7.14bn) of total loss-absorbing capacity (TLAC) non-capital bonds in its latest fundraising effort. The bank will act as the third issuer of TLAC bonds this year in China, following Bank of China and ICBC. Agricultural Bank of China recently received approval to issue TLAC bonds.

China Construction Bank (CCB) said that it would issue non-capital bonds worth CNY 30bn ($4.44bn), and that the sale would be held from August 8-12.

CCB's new debt sale comes after Bank of China and ICBC recently issued a combined CNY 80 billion of similar bonds. The TLAC bonds are a new kind of capital instrument ordered by the Basel Committee on Banking Supervision, and should help the banks to meet new capital requirements from 2025.

The move comes just days after China Construction Bank received regulatory approval for the capital-raising exercise. The bank has initially been given 50 billion yuan ($7.2 billion) quota to issue TLAC bonds.

Total loss-absorbing capacity (TLAC) is the term used to describe a buffer of securities that can be written down or converted to equity if a bank gets into financial difficulties. TLAC non-capital bonds are a type of debt security issued by global systematically important banks to meet TLAC requirements. They have loss-absorbing features, but are not part of banks' regulatory capital, typically have long tenors, and may contain features such as triggers that convert them into equity when certain conditions are met.

Galaxy Securities analyst Liu Yakun said: "The issuance of TLAC non-capital bonds, on the one hand, can effectively supplement capital for China's global systematically important banks. On the other hand, the issuance of TLAC non-capital bonds will also increase the variety and quantity of credit bond supplies in the domestic market. In addition, the issuance of TLAC non-capital bonds will help state-owned banks meet international regulatory requirements in good time."

"Proceeds from the bond sale will be utilized to improve the issuer's total loss-absorbing capacity in accordance with applicable laws and regulations and approval by the competent authorities," CCB said in a prospectus.

Industry insiders expect TLAC issuance to further expand.

Under the rules governing global systemically important banks' total loss-absorbing capacity, China's "big four" banks are required to meet the TLAC risk-weighted ratio and TLAC leverage ratio requirements by the end of 2024 and 2027, respectively. Alternatively, they can issue enough debt that qualifies as TLAC under regulators' prescriptions. The Bank of Communications, the country's fifth-largest bank, was just added to the global list of systematically important banks last year, so it has until November 2023 to meet TLAC requirements.

"The TLAC regulatory system requires the four state-owned banks to reach the first-stage standards by January 1, 2025. Currently, Bank of China and Industrial and Commercial Bank of China have completed the first batch of 80 billion TLAC bond issuances, and the scale of subsequent issuances is expected to further increase." Citic Sec analyst Xiao Feifei said that according to calculations, if the deposit insurance fund is included at the upper limit of 2.5%, the pressure on the four major banks to meet the first-stage standards is not great, but for bank operations, normalized issuance of TLAC bonds can support the expansion of bank scale and is expected to promote the reduction of debt costs, helping to improve the operating capacity of China's G-SIBs."

"Regarding the TLAC gap and future issuance plans of the five state-owned banks, Liu Yakun believes that according to calculations based on the first quarter report data of 2024, the total capital gap of the five state-owned banks in 2025 and 2028 is about 1.3 trillion and 3.2 trillion, respectively. It is planned to issue TLAC non-capital bonds totaling no more than 44 billion yuan for the five state-owned banks in 2024. However, based on the possible TLAC gap, there is room for the five selected banks in China to increase their issuance efforts."

"TLAC non-capital debt instruments are important debt instruments for supplementing TLAC in addition to perpetual bonds and Tier 2 capital bonds for banks. The five state-owned banks will face higher assessment requirements in 2028 and 2030, and there is still considerable room for expanding TLAC non-capital instruments." Htsc analyst Zhang Jiqiang also said."

"Wang Yifeng, chief financial industry analyst at Everbright Securities, also told Caixin reporters earlier that if supervision only allows the TLAC gap to be calculated based on the balance of the deposit insurance fund formed by actual payment of insurance premiums, the TLAC gap of the four major banks will be at the level of trillions, or concentrated in the issuance of TLAC bonds in 2024. In addition, if further considered, the TLAC risk-weighted ratio requirement will be raised by 2 percentage points to 18% at the beginning of 2028, and there will be sustained supply of TLAC bonds from 2025 to 2028."