The capital replenishment drive among Chinese commercial banks continues at a robust pace, with the issuance of Tier-2 capital bonds and perpetual capital bonds—collectively known as “two永 bonds” (or “2Y bonds”)—surpassing 810 billion yuan in the first half of 2025. This marks a year-on-year increase of over 27 billion yuan, signaling sustained demand for external capital sources amid evolving regulatory and economic conditions.
As regional and smaller banks face mounting pressure to maintain adequate capital buffers, the bond market remains a critical tool for financial stability and growth. The momentum picked up notably in the second quarter, following a relatively slow start in the first three months of the year.
Q2 Sees Surge in “2Y Bond” Issuance
According to Wind Information, commercial banks issued a total of 52 “2Y bonds” in the first half of 2025, raising 812.56 billion yuan—a 3.43% increase compared to the same period last year. The most striking trend was the sharp rebound in Q2, where issuance volume reached 638.7 billion yuan, representing a staggering 267% sequential growth and a 22.23% year-on-year rise.
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Market observers attribute the early-year slowdown to broader bond market volatility and expectations of state-backed capital injections into major state-owned banks. However, by April and June, investor sentiment stabilized, unlocking a wave of new offerings.
State-Owned Banks Lead, But Smaller Lenders Gain Ground
While large state-owned banks remain dominant players in the bond market, their share has slightly declined compared to previous years. The "Big Five"—Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, China Construction Bank, and Postal Savings Bank of China—issued a combined 410 billion yuan in "2Y bonds", accounting for 50.46% of total issuance. However, this figure reflects a 46-billion-yuan drop from the same period last year.
In contrast, joint-stock banks, city commercial banks (city coms), and rural commercial banks (rural coms) significantly increased their presence. These institutions collectively raised 402.56 billion yuan, a 22.15% year-on-year increase, highlighting growing reliance on market-based funding mechanisms.
This shift underscores an important trend: as profitability pressures limit internal capital generation—especially for smaller lenders—external tools like perpetual bonds, convertible bonds, and equity placements are becoming essential for regulatory compliance and operational resilience.
Why Are Smaller Banks Increasing Bond Issuance?
Experts point to several structural challenges facing regional and mid-tier financial institutions:
- Declining profit margins: Net interest margins have narrowed due to interest rate liberalization and competitive lending practices.
- Limited retained earnings: Lower profits mean less capital can be reinvested internally.
- Tighter regulatory standards: New capital rules and TLAC (Total Loss-Absorbing Capacity) requirements demand higher-quality capital.
- Reduced access to approvals: Rural commercial banks, in particular, face tighter caps on issuance quotas.
“Smaller banks are under significant capital pressure,” said Lou Feipeng, researcher at Postal Savings Bank of China. “With internal capital accumulation slowing, they must turn to external channels. Perpetual and Tier-2 bonds are among the most practical options available.”
Despite this, market differentiation persists. While issuance volumes rise, spreads between large and small bank bonds remain wide, reflecting higher risk premiums demanded by investors for less-transparent or regionally concentrated lenders.
“Although overall issuance yields have trended downward in 2025, the credit spread for smaller institutions remains elevated,” noted Ming Ming, Chief Economist at CITIC Securities. “This indicates ongoing concerns about asset quality and governance in certain segments of the banking sector.”
Outlook: Will “2Y Bond” Supply Continue to Expand?
Looking ahead to the second half of 2025, experts anticipate that issuance volumes will remain strong, particularly among joint-stock and city commercial banks.
Several factors support this outlook:
- Large maturity wall: A significant volume of existing "2Y bonds" will mature or become callable, prompting refinancing needs.
- Regulatory deadlines: Upcoming implementation phases of new capital frameworks require banks to meet stricter thresholds.
- Limited fiscal support: Unlike state-owned giants that may benefit from special treasury bond infusions, most regional banks must self-fund capital upgrades.
Ming Ming emphasized that while state-owned banks may scale back issuance due to government-backed recapitalization, mid-sized banks will likely drive incremental supply—especially those located in economically vibrant regions with stronger fiscal backing and better credit profiles.
Rural commercial banks, however, are expected to face continued constraints due to smaller asset bases and tighter approval limits from regulators.
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Core Keywords Driving Market Trends
Understanding the forces behind this capital market activity requires attention to key themes:
- Commercial bank capital replenishment
- Perpetual bond issuance
- Tier-2 capital bonds
- Bank solvency regulation
- External capital financing
- Regional bank risk profile
- TLAC compliance
- Interest rate risk management
These keywords not only reflect current market dynamics but also align with investor search behavior and regulatory discourse.
Frequently Asked Questions (FAQ)
Q: What are “two永 bonds” (“2Y bonds”)?
A: “Two永 bonds” refer to two types of regulatory capital instruments issued by banks: Tier-2 Capital Bonds and Perpetual Bonds (also called Additional Tier-1 Capital Bonds). They help banks meet capital adequacy requirements and absorb losses during financial stress.
Q: Why do banks issue perpetual bonds if they never mature?
A: While perpetual bonds have no fixed maturity date, they typically include call options allowing issuers to redeem them after five or ten years. For investors, they offer higher yields; for banks, they provide long-term capital without immediate repayment pressure.
Q: Are “2Y bonds” safe for investors?
A: These bonds are generally considered safer than equities but carry more risk than senior debt. In case of bank failure, holders are paid after depositors and senior bondholders. Smaller bank issuers often pay higher yields to compensate for perceived risks.
Q: How do “2Y bonds” affect a bank’s capital ratios?
A: Both Tier-2 and perpetual bonds count toward a bank’s Total Capital Ratio. Perpetual bonds qualify as Additional Tier-1 capital, while Tier-2 bonds count as Tier-2 capital—both improving overall capital adequacy under Basel III and domestic regulatory frameworks.
Q: What is TLAC, and why does it matter for bond issuance?
A: TLAC (Total Loss-Absorbing Capacity) is a global standard requiring systemically important banks to hold sufficient capital that can be written down or converted to equity during resolution. It drives demand for eligible instruments like perpetual bonds.
Q: Can individual investors buy these bonds?
A: Yes, many “2Y bonds” are listed on exchanges or available through interbank markets accessible via brokerage platforms. However, they require careful credit analysis due to subordination and potential write-down features.
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With regulatory scrutiny intensifying and economic uncertainties lingering, the trend of rising "2Y bond" issuance—especially among non-state lenders—is likely to persist through 2025. As banks navigate tighter capital rules and weaker earnings growth, the ability to access deep and liquid debt markets will remain a cornerstone of financial strength.