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China Banks Rally on Report of Preferred Shares: Shanghai Mover

Shanghai Pudong Development Bank
A pedestrian walks past the former HSBC headquarters building, which now houses Shanghai Pudong Development Bank Co., on the Bund at night in Shanghai. Photographer: Tomohiro Ohsumi/Bloomberg

Chinese banks rallied after a newspaper reported that the securities regulator may allow some lenders to sell the country’s first preferred shares, giving them a new way to meet long-term fundraising requirements.

Shanghai Pudong Development Bank Co. surged by its daily limit of 10 percent to 10.53 yuan at 1:06 p.m. in Shanghai. Agricultural Bank of China Ltd., the nation’s third-largest lender by market value, rose as much as 9.7 percent, heading for its biggest gain since the shares started trading in 2010. Bank of Communications Co. climbed 10 percent.

The China Securities Regulatory Commission has held meetings with banks on allowing them to sell preferred shares, with Pudong Bank and Agricultural Bank likely to be the first to do so, Money Week reported. Chinese banks have this year announced plans to raise as much as 327 billion yuan ($53 billion) as capital rules tighten.

“Selling preferred shares will enable banks to have a continuous supply of capital without adding pressure on equity investors,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp. “Banks are the best candidates to be the pilots, because of their stable earnings ability.”

The securities, which often lack voting rights, can provide a new financing tool for blue-chip companies that have a high debt ratio and seek to improve their ownership structure, the regulator said in a July 12 press briefing.

Profit Distribution

The CSRC is drafting rules on preferred shares and will publish them as soon as possible, it said. Owners of preferred shares have priority over common equity shareholders in receiving the company’s profits and remaining assets, according to the CSRC.

The CSRC didn’t immediately respond to a fax seeking comment today. Phone calls to Agricultural Bank and Pudong Bank weren’t answered.

Under capital rules that took effect in China on Jan. 1, lenders that aren’t classified as systemically important must have a minimum core Tier 1 ratio of 5.5 percent, a Tier 1 ratio of 6.5 percent and a total ratio of 8.5 percent by the end of 2013. Those levels will rise by 0.4 percentage point a year for the following five years.

Banks’ current fundraising plans center on instruments allowed under the new rules -- mostly bonds that are automatically written down if the issuer’s capital drops below a certain level. Agricultural Bank said earlier it plans to sell 50 billion yuan of Tier 2 debt and raise another 40 billion yuan to boost Tier 1 capital.

Preferred shares will be qualified as Tier 1 capital, Masterlink’s Yuan said.

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