China Plans Capital Investment of up to 1 trillion yuan ($142 billion) to Foster the capacity of largest state-owned bank.

The mega infusion would for the first time in history be fully funded by special sovereign bonds, which China can issue without regard to fiscal deficit limits.

Although details of the plan remain up in the air, capital injection is intended to increase the banks’ ability to offer more credit, even as the nation’s top six banks have levels of capital much higher than regulatory mandates. Meanwhile, Chinese authorities implement a series of measures to help revive the economy, including sweeping across-the-board cuts in mortgage rates and reductions in key policy rates.

The state banks, including Industrial & Commercial Bank of China Ltd. and Bank of China Ltd., have been witnessing narrowing margins with falling profits and increasing bad debts. Still, the institutions were pressured into serving a purpose in the economy by providing cheaper loans to the riskier borrowers: real estate developers and financing vehicles of local governments.

Top banking regulator Li Yunze suggests that authorities are contemplating how to fortify core tier 1 capital at China’s major banks; this could be perceived as fiscal stimulus, with the potential to make sure the banks do keep lending even as property prices plummet.

The proposed capital injection also happens at a strategic time for the Chinese government. Back in April, China began issuing another batch of ultra-long special sovereign bonds worth 1 trillion yuan. A record low yield of 2.19% achieved through  the 30-year bond auction.

This is considered to be critical in stabilizing the financial sector of China because banks will be allowed to continue giving out loans without being intimidated by the seemingly unending economic crisis, such as the crash in real estate.

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