The state will provide

6 July 2010 By John Foley Follow @johnsfoley

The biggest banks need $57 billion in equity, but over 40 percent may come from the state. It will fund that by issuing bonds to wait for it Chinese banks. This bizarre alchemy will boost capital ratios, but for China’s financial system it looks like a step backwards.

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Bank of China scrapped a planned placing of shares in Hong Kong, in favour of a 60 billion yuan ($8.9 billion) rights issue in Hong Kong and Shanghai. The lender had already announced a 40 billion yuan convertible bond issue. Together the new instruments would increase the bank's capital adequacy ratio to 12 percent.

Industrial and Commercial Bank of China was also likely to follow Bank of China in moving to a rights issue in Hong Kong and Shanghai, instead of a Hong Kong share placing, Reuters reported on July 6.

Central Huijin, the stateowned vehicle that owns shares in most of China's large lenders, is expected to follow its rights in any new share issues. It is planning to issue bonds worth at least 120 billion yuan ($18 billion) to finance its purchase of new rights issue shares, according to Reuters.

Three other banks China Merchant's Bank, Bank of Communications and China Construction Bank have also announced plans for rights issues to shore up their regulatory capital. CMB and Bocom completed their issues already, while CCB's is expected for later in the year.

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