(Yicai Global) Aug. 22 -- Gansu province in northwestern China issued CNY30 billion (USD4.4 billion) of special bonds for small and mid-sized banks this afternoon, with the proceeds set to replenish capital at the lenders and mitigate financial risk.

Gansu is the second provincial government to sell such special bonds this year, following Liaoning in the northeast, which issued CNY13.5 billion in April to shore up five local urban commercial banks.

According to the issuance documents posted on ChinaBond.com, the special debt issued by Gansu will mature in 10 years. The bonds will provide supplementary capital for 11 small and mid-sized lenders in the province, and will be repaid mainly by interest, financial institution transactions, as well as fees and commissions earned by the banks.

The 11 lenders are all in the rural credit system. The bank receiving the most was Lanzhou Rural Commercial Bank, with a total of CNY9.26 billion (USD1.36 billion), while Qingcheng County Rural Credit Union received the least at CNY495 million (USD72.5 million), according to the documents.

Rural lenders are the weakest in China’s banking sector. The latest data from the China Banking and Insurance Regulatory Commission showed that as of the end of the first quarter, the average capital adequacy ratio of rural commercial banks was only 12.33 percent, the lowest among all bank types. And in the same period, their average bad loan ratio was as high as 3.37 percent, far exceeding the level at other lenders.

But according to a report from United Ratings, given that the special bonds will be included in the government fund budget and the expected return can cover the principal and interest of the notes along with other positive factors, the risk of the them not being repaid at maturity is extremely low, so they can be rated ‘AAA,' the highest level.

To help small and mid-sized banks resolve their operational risks and enhance their ability to issue loans, the CBIRC has prepared a total of CNY320 billion (USD46.9 billion) of special debt lines for provincial and big municipal governments this year, and all the quotas for these governments are expected to be set by the end of this month.

After Liaoning and Gansu sold their special bonds, the local authorities still have CNY276.5 billion quotas waiting to be distributed. Issuances are expected to accelerate in the remainder of the year.

In December 2020, the Guangdong provincial government issued CNY10 billion in special bonds to support four small-sized local commercial banks, becoming the first local authority to do so. Since then, dozens of provincial and municipal governments have followed suit.

Editors: Tang Shihua, Tom Litting