China’s central bank has decided to set up a central bank bill swap (CBS), aiming to encourage banks to replenish their Tier 1 capital by issuing perpetual bonds, The Paper reported.

Primary dealers who participate in the central bank’s open market business can use perpetual bonds issued by qualified banks to exchange central bank bills from the People’s Bank of China (PBOC).

Meanwhile, the PBOC also said that banks’ perpetual bonds with ratings no lower than “AA” will be included as qualified collateral for a medium-term lending facility, targeted medium-term lending facility, standing lending facility and re-lending.

At present, the CBS program can accept perpetual bonds issued by banks that meet the following conditions: first, the capital adequacy ratio at the end of the latest quarter is not less than 8%; second, the non-performing loan ratio calculated by the overdue 90-day loans at the end of the latest quarter is below 5%; third, it was earning profits in the last three years; fourth, the asset size at the end of the latest quarter was not less than 200 billion yuan; and fifth, it can increase support for the real economy after replenishing capital.