China's four largest state banks are planning private stock placements totaling up to $72 billion to increase their core tier-1 capital as per Beijing's directive to reinforce financial buffers to back the economy.

According to filings over the weekend, Bank of Communications Co. will offer up to 120 billion yuan ($16.5 billion) of A shares through private placement, involving investors such as the Ministry of Finance. Similarly, Bank of China Ltd., Postal Savings Bank of China Ltd., and China Construction Bank Corp. are planning placements of A shares worth 165 billion yuan, 130 billion yuan, and 105 billion yuan to the finance ministry and other investors, individually.

These state banks have the finance ministry as a significant shareholder in each of them. The decision to issue special sovereign bonds worth 500 billion yuan to enhance capital at the largest state-owned banks was made by Chinese authorities in early March. Although these lenders already exceed capital requirements, China is reinforcing its banking system in view of recent stimulus measures and challenges faced by the banks.

Despite the lenders' strong capital levels, they are confronting tough conditions such as low margins, slower profit growth, and a rise in non-performing loans. The banking sector's net interest margin hit a historic low of 1.52% as of the end of 2024. Strengthening capital reserves will enable banks to potentially extend more loans, aligning with Beijing's commitment to provide increased support to various sectors like real estate, consumer goods, and technology to achieve a growth target of around 5% this year.

This move will not only maintain financial stability in China but will also help mitigate risks stemming from both domestic issues and trade tensions with the US.