Huaxia Bank Co, partly owned by Deutsche Bank AG, was approved to sell as much as four billion yuan (US$525 million) of a special hybrid bond to boost capital that's near the regulatory minimum.

Huaxia Bank will sell 15-year fixed-yield bonds in the inter-bank market after winning regulatory approval, the Beijing-based lender said in a statement yesterday. Owners of the bond, called a hybrid because it combines features of equity and debt, have less priority than common bondholders in claims on the bank's assets.

Huaxia needs to raise funds to maintain a capital adequacy ratio of eight percent, as required by the central bank, Bloomberg News reported. The bank's ratio was 8.28 at the end of December and may have fallen after the central bank increased the amount banks must set aside as reserves five times this year to slow lending. Banks that fall below the limit can be restricted in their ability to make loans and expand.

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Banks are being encouraged to sell bonds and shares to boost capital and prepare for greater competition, after overseas banks were allowed full access to China's consumer banking market in December. Huaxia said in March it aims to sell 4.5 billion yuan of hybrid bonds and 15 billion yuan of regular debt in the first half.

Unlike regular bonds, hybrid bonds count as supplementary capital. These special bonds allow the bank to delay interest payments when its capital-adequacy ratio dips below four percent or it's unable to pay other bondholders who have priority claims over its assets.

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