A growing number of Chinese banks, especially small and medium-sized commercial lenders, are issuing perpetual bonds to replenish capital as part of concerted efforts to increase lending to small businesses amid the novel coronavirus outbreak.

A perpetual bond is a bond without a maturity date. The instruments are nonredeemable, but offer steady returns.

During the first five months of this year, 14 banks issued perpetual bonds worth 282.9 billion yuan ($39.7 billion). Among them, 10 small and medium-sized commercial lenders, including Zhejiang Tailong Commercial Bank Co Ltd, Bank of Jiangsu Co Ltd and Shenzhen Rural Commercial Bank Co Ltd, issued 47.9 billion yuan of perpetual bonds, accounting for 17 percent of the total issuance volume, according to Wind, a financial data provider in China.

Both the number of banks that issued perpetual bonds and the issuance volume increased significantly on a yearly basis.

During the same period in 2019, Bank of China Ltd, a large State-owned commercial lender, and China Minsheng Banking Corp, a national joint-stock commercial lender, issued perpetual bonds of 40 billion yuan each.

The coupon rates of five-year perpetual bonds issued by small and medium-sized banks ranged from 3.8 percent to 5.8 percent in the first five months of this year, while large State-owned commercial lenders issued such bonds at coupon rates as low as 3.4 percent.

China will further promote the deepening of reforms for small and medium-sized banks and help accelerate capital replenishment and raising funds through multiple channels, the office of the financial stability and development committee under the State Council said on May 27.

The scope of perpetual bond issuers has been expanding continuously. MYbank, a privately owned online-only bank, received approval from the China Banking and Insurance Regulatory Commission's Zhejiang office to issue up to 5 billion yuan of perpetual bonds, the office announced on May 20. It became the first private bank that has got the green light to issue perpetual bonds.

Such bonds will provide banks with a source of long-term funds and support continuous expansion of their banking business. As some perpetual bonds can be recorded as equity instruments in accounting books, issuing this type of bonds will lower the leverage of small and medium-sized banks, said Wang Gang, research fellow with the Research Institute of Finance under the Development Research Center of the State Council, in an article published in China Finance on Monday.

Compared with preferred shares, perpetual bonds have a lower cost of funds and a shorter issuance approval cycle. They are also better than tier-2 capital bonds, which have limited capabilities in improving the capital quality and optimizing the capital structure of small and medium-sized banks. Therefore, perpetual bonds are the best channel for unlisted small and medium-sized banks to replenish tier-1 capital, the primary funding source of banks, Wang said.

To help small and medium-sized banks replenish capital through multiple channels and optimize their capital structure, China's top banking and insurance regulator said on May 27 it would relax rules for insurance funds to invest in banks' capital replenishment bonds. The China Banking and Insurance Regulatory Commission canceled requirements regarding issuer banks' assets and credit ratings, in addition to removing requirements that insurance funds only invest in tier-2 capital bonds with AAA credit ratings, and in perpetual bonds rated at least AA+.