People's Bank of China and China Banking Regulatory Commission, Administration of the Issue of Commercial Bank Subordinated Bonds Procedures

Promulgated: June 17 2004
Effective: as of date of promulgation
Interpreting authority: People's Bank of China and China Banking Regulatory Commission (CBRC)
Applicability: The Procedures also apply to issue of Subordinated Bonds by policy banks (Article 40). "Commercial bank subordinated bonds" (hereafter, Subordinated Bonds) refers to bonds issued by commercial banks, where the order of repayment of principal and interest is placed after other liabilities of commercial banks but before equity capital of commercial banks (Article 2).

Main contents: Subordinated Bonds may be included in supplementary capital, subject to the approval of the CBRC (Article 2). Public and private issues of Subordinated Bonds may be carried out in the national interbank bond market. Commercial banks may also privately issue subordinated debt with fixed term in accordance with the relevant provisions issued by the China Banking Regulatory Commission (Article 3). A subordinated bond issuer (hereafter, Issuer) shall be a commercial bank legal person established within China in accordance with the law (Article 4). Issue of Subordinated Bonds by commercial banks shall have a verification certificate issued by an investment institution authorized by the state; or be submitted to the shareholders' general meeting for a resolution. Such resolution shall include the size and term of the issue, purpose of fund raising, and the period of validity of the approval or resolution (Article 8). Public issue of Subordinate Bonds by commercial banks shall meet the following conditions: (1) loans shall be divided into five categories with little deviation among them; (2) a core capital adequacy ratio of not less than 5%; (3) full provision of loan-loss reserves; (4) sound corporate governance structures and mechanisms; and (5) no major violation of laws or regulations in the most recent three years (Article 9). The conditions for private issue of Subordinated Bonds or issue of subordinated debt with fixed term are essentially the same as the public issue except that the core capital adequacy ratio shall not be less than 4% (Article 10). Article 13 stipulates that the balance of Subordinated Bonds issued by other banks that are held by a commercial bank shall not exceed 20% of its core capital. Subordinated Bonds may be distributed by way of underwriting, on an agency basis or through bidding procedures. A distributor shall be a financial institution that has: (1) registered capital of not less than Rmb200 million; (2) comparatively stronger capability in bond distribution; (3) professionals who are qualified for engaging in bond market business and channels for the distribution of bonds; (4) no major violation of laws or regulations in the most recent two years; and (5) other conditions required by the People's Bank of China (Article 18). Where Subordinated Bonds are privately issued, issuers may be exempted from credit rating. Privately issued Subordinated Bonds may only be transferred among subscribers. Subordinated debt with fixed term may, subject to approval, be transferred with reference to the method of transferring Subordinated Bonds (Article 23). Part Four concerns registration, custodianship and cash. Commercial banks shall issue a public announcement that has to be reported to the People's Bank of China for the record five working days prior to issue of Subordinated Bonds (Article 31).
Related legislation: PRC People's Bank of China Law (Revised), Dec 27 2003 CLP 2004, No.1 p4; PRC Banking Regulation Law, Dec 27 2003, CLP 2004 No.1 p45 and PRC Commercial Banking Law (Revised), May 10 1995, CLP 2004 No.1 p4