China pulls in Big Tobacco to help with smaller-than-expected finance-industry capital injections

China's finance ministry is leading a smaller-than-expected $54 billion capital injection into state-owned banks and insurers, as Beijing seeks to foster growth with restrained stimulus.

Three state lenders and five insurers will get a combined 360 billion yuan ($53.6 billion) from state institutions, led by the Ministry of Finance and the country's tobacco giant. It's the first time that Beijing has extended recapitalization to insurers, as stress in the country's financial system spreads. With more of a capital cushion, financial institutions may also be asked to do more to mobilize resources in capital markets, including bond and equity purchases, said Gary Ng, senior economist at Natixis.

The recapitalization was smaller in scale than markets had anticipated for these financial institutions, according to Citibank. "This downsized package underscores the healthier capital positions of Chinese insurers, indicating an overall lower urgency for aggressive capital replenishment."

Hong Kong-listed shares of the banks and insurers slumped Monday, underperforming the broader market. The Hang Seng Index fell less than 1%, while Agricultural Bank of China and Industrial and Commercial Bank of China dropped 2.7% and 2.3%, respectively. China Taiping Insurance lost almost 4%, while People's Insurance Company of China and China Life Insurance each fell more than 2%.

The moves build on a 500 billion yuan capital injection into four major state banks last year and a pledge in March to issue 300 billion yuan in special treasury bonds this year to replenish capital at large state lenders. China's banking sector has been grinding through a multiyear margin compression, as Beijing pushes lenders to keep credit cheap for struggling borrowers. The net interest margins — the spread between what banks earn on loans and pay on deposits — fell to record lows this year.

Beijing is preparing lenders to finance its next strategic investment cycle, "particularly the massive capital requirements of AI and advanced technology," said Han Shen Lin, China country director at The Asia Group. "China is effectively using state capital to strengthen the banking system's shock absorbers."

Agricultural Bank and ICBC, two of the country's largest state banks, plan to raise up to 160 billion yuan and 100 billion yuan, respectively, through private A-share placements to a group of institutions, including the finance ministry, and China National Tobacco Corp and its subsidiaries. Proceeds will be used entirely to replenish capital, according to their statements on Sunday.

The Export-Import Bank of China will get a direct 30 billion yuan injection from the finance ministry, aimed at strengthening its ability to "provide funds to the real economy and withstand potential risks."