In a communist society, all citizens are created equal. Until this week, so were all shareholders. But on Thursday, Bank of China sold China’s first preference shares – hybrid securities that convert to common equity if capital ratios fall too far. The Rmb40bn ($6.5bn) issue priced at a 6.75 per cent yield, in the middle of the expected range. Still, the pricing was attractive enough for demand to be reportedly three times the deal size.
The yield looks generous compared with the available alternatives. Up until last week, when Chinese property developer Agile ran into trouble, that sector’s listed bonds were offered at similar levels. Bank of China’s own common shares yield 7 per cent.
By these measures, the yield is too high. But this is only the first of such deals from the Chinese banks. Preference share approvals suggest $50bn yet to come. With common equity issuance below book value unpalatable, the sector has limited options for improving tier one capital adequacy ratios.