The Er Yong debt market welcomes a "rebalancing wave"! Why are bank issuances experiencing uneven "warm and cold" conditions?

China Economic Journal Reporter Qin Yufang, Guangzhou Report

Recently, several banks have successively disclosed progress on the redemption of secondary perpetual bonds, and banks’ enthusiasm for “redeeming old bonds and issuing new ones” has continued to heat up. Industry insiders believe that, given the replacement demand for outstanding secondary perpetual bonds, the relatively strong expansion of balance sheets (expansion of assets) and capital replenishment needs of large and medium-sized banks, and the current market interest-rate environment at a relatively low level, it is expected that the issuance of secondary perpetual bonds throughout 2026 will still remain relatively active. However, affected by factors including operating risks, market recognition, and the substitution of local special bonds, the participation of small and medium-sized banks in the issuance of secondary perpetual bonds will further decline, and the trend of structural differentiation among issuers in 2026 is likely to continue.

Redemption of secondary perpetual bonds exceeding 1 trillion yuan

On March 25, the Postal Savings Bank of China announced that it had fully redeemed the 30 billion yuan decrement-type perpetual capital bonds (Phase I) issued in March 2021 in the national interbank bond market.

At the same time, on March 20, Bank of China issued an announcement stating that it had exercised its redemption option and fully redeemed 150 billion yuan worth of 10-year tier-2 capital bonds issued in 2021.

According to Wind data, from January to March 25, 2026, 28 secondary perpetual bonds were redeemed, with a total scale of 121.7 billion yuan, including 26 redeemed by commercial banks, with a total amount exceeding 115.0 billion yuan.

From a trend perspective, the scale of secondary perpetual bonds entering the redemption exercise period in 2026 exceeds 1 trillion yuan. Song Ge, Deputy General Manager of the Financial Institution Rating Department at China Securities Pengyuan, pointed out that in 2026, a total of 124 commercial bank secondary perpetual bonds across the whole market will enter the redemption exercise period, with a combined issuance scale of 1,029.763 billion yuan, involving 96 issuers.

Meanwhile, banks’ enthusiasm for issuing secondary perpetual bonds is also rising significantly. Song Ge said that in 2025, commercial banks issued 148 secondary perpetual bonds, with a total issuance scale of 1,759.67 billion yuan; both the number and scale of issuances increased compared with 2024.

Overall, in 2025, the “redeem old and issue new” trend for commercial bank secondary perpetual bonds was very clear. Song Ge analyzed that the redemption of secondary perpetual bonds will lead to a decline in the corresponding banks’ capital adequacy indicators. Therefore, whether from the perspective of regulators’ pre-approval, or from the standpoint of maintaining their own capital adequacy levels, normally operating commercial banks generally issue new secondary perpetual bonds before or around the time they redeem existing secondary perpetual bonds. Judging from the issuers that actually redeemed in 2025, most of them proceeded with re-issuance; and as market interest rates overall declined, the coupon rates of their newly issued secondary perpetual bonds dropped more significantly compared with the redeemed secondary perpetual bonds.

“Entering 2026, considering the replacement needs for existing secondary perpetual bonds, the expansion of large and medium-sized banks and their capital replenishment demands remain relatively strong, and the market interest-rate environment is at a relatively low level; therefore, the issuance of secondary perpetual bonds for the whole of 2026 may still remain relatively active,” Song Ge emphasized.

Participation from small and medium-sized banks declines

From the perspective of issuance structure, although the overall issuance scale of secondary perpetual bonds remains high, small and medium-sized banks’ participation is not active.

Xu Wenchao, Director of Financial Institutions Ratings for the Asia-Pacific region at Fitch Ratings, analyzed that the channels for small and medium-sized banks to replenish capital are already relatively limited. Some small and medium-sized banks’ capital adequacy ratios are already close to regulatory red lines; by issuing secondary perpetual bonds, they can quickly and effectively replenish other tiers of capital, including other additional tier-1 and tier-2 capital.

Song Ge, meanwhile, said that in 2025, the issuers of secondary perpetual bonds were still mainly high-rated banks (including state-owned banks and high-rated city and rural commercial banks). For low-rated small and medium-sized banks (mainly low-rated city and rural commercial banks, especially rural commercial banks), their market participation in issuing secondary perpetual bonds may still be at a lower level. “In 2025, small and medium-sized banks with issuer ratings of AA and below issued only 14 secondary perpetual bonds, with a combined issuance scale of only 7.370 billion yuan, and their participation level in the whole market further declined; whereas commercial banks with issuer ratings of AAA issued 104 secondary perpetual bonds, with a total issuance scale of 1,697.7 billion yuan, and commercial banks with issuer ratings of AA+ issued 30 secondary perpetual bonds, with a combined issuance scale of 546 billion yuan.”

Song Ge believes that in 2026 this kind of issuer structure may continue.

In Song Ge’s view, the reasons that small and medium-sized banks’ issuance of secondary perpetual bonds is not active include multiple factors: first, some small and medium-sized banks have relatively higher operating risks, weak market recognition, and high bond issuance costs; second, the number of outstanding secondary perpetual bonds held by small and medium-sized banks is already relatively small, and replacement issuance demand is insufficient; third, small and medium-sized banks are hit more strongly by competition among peers from large and medium-sized banks and the impact of business downscaling, resulting in weaker needs for balance-sheet expansion and capital replenishment; fourth, local governments’ special bonds for replenishing the capital of small and medium-sized banks, as well as the restructuring of provincial rural credit cooperatives (provincial union cooperatives) and the setup/merger of province-level city commercial banks and province-level unified-legal-entity rural commercial banks, weaken some small and medium-sized banks’ need to replenish capital by issuing secondary perpetual bonds.

Xue Huiru, Director of Financial Institutions Ratings for the Asia-Pacific region at Fitch Ratings, further pointed out that in 2025, commercial banks reached a peak in the redemption of secondary perpetual bonds. Overall, large and medium-sized banks are redeeming in an orderly manner, while a small number of regional small banks, due to continued pressure on asset quality, profitability, and capital levels, have chosen not to redeem.

“Since 2019, commercial bank secondary perpetual bond issuance has remained high, which means that in 2026, they will still face relatively high redemption pressure. From the structural perspective, some small and medium-sized banks—especially smaller banks located in relatively less developed regions—due to higher funding (liability) costs and a stronger risk appetite, may continue to face pressure on profitability, asset quality, and capital levels. These banks will face greater redemption pressure, and may even face the risk of not redeeming, which will further raise the costs and increase the difficulty of issuing debt instruments and replenishing capital,” said Xue Huiru.

(Editor: Yang Jingxin; Reviewed by: He Shasha; Proofread by: Zhai Jun)

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