PBOC opens up new financing channels for entities in the Shanghai Free Trade Zone

PBOC opens up new financing channels for entities in the Shanghai Free Trade Zone

New measures of the PBOC have reformed the approval and quota-based system for borrowing RMB and foreign exchange outside China (together "foreign debt"). The new measures allow more flexibility for corporates and non-bank financial institutions incorporated in the SFTZ, as well as the separate SFTZ accounting units ("FTUs") of Shanghai based banks for business booked in the SFTZ, to structure their foreign debt profiles. The publication of the measures marks the start of the third wave of SFTZ financial reform following the release of the PBOC’s blueprint for financial reform in 2013 and the roll-out of the free trade account ("FTA") system in 2014.

Highlights of the new measures include:

  • Alternative foreign debt limits: SFTZ enterprises which opt into the new system can borrow an aggregate amount of foreign debt of up to the product of (i) the borrower’s capital, (ii) a leverage ratio which varies according to institution, and (iii) a macro-prudential parameter (currently set at one) through their FTAs.
  • Limit on outstanding debt only: Borrowers benefit from the limit applying to total outstanding foreign debt, rather than (as is generally the case under the old system for debt with a term exceeding one year) total borrowings of foreign debt.
  • Exemptions and haircuts: Overseas deposits in FTAs, trade credits, trade/investment guarantees, RMB trade finance and intra-group capital flows (including the proceeds of panda bonds re-invested in the issuer’s SFTZ subsidiaries) do not reduce the borrower’s permitted foreign debt. Haircut percentages of 80 per cent. for foreign currency trade finance and between 50 to 80 per cent. for off-balance sheet financing are applied.
  • Risk weighting: The calculation of foreign debt includes risk weighting. Loans with a term of under one year have higher weighting than longer term loans, foreign currency loans have higher weighting than RMB loans, and off-balance sheet financing in the form of contingent liabilities is deemed less risky than on-balance sheet financing.
  • Banks benefit: Shanghai banks’ FTUs will no longer need to obtain foreign debt quotas if they opt into the new system. Banks established in the SFTZ will enjoy the highest leverage ratios of five times Tier 1 capital.
  • Expedited procedure: Regulatory approval will not be required to borrow foreign debt within the applicable limit, though non-bank borrowers must file with PBOC no later than three working days before drawdown. The loan proceeds are freely convertible, though subject to the same rules which apply to FTAs: they have to be used in the SFTZ or outside China or otherwise for the borrower’s own business, and certain transfers to PRC accounts outside the SFTZ are subject to existing foreign debt regulations. Whilst foreign invested enterprises have been governed by similar rules, these reforms will be of particular interest to domestic borrowers.
  • Jurisdiction: To implement the new system and make the necessary changes to the pre-existing regime, guidance is awaited from the NDRC and SAFE, which are the authorities responsible for foreign debt regulations in China.

Reference: Experimental Implementing Rules for Macro-prudential Management of Overseas Financing of Separately Accounted and Audited Business Units and Cross-border Funds Flows in the China (Shanghai) Free Trade Zone ("SFTZ") (《中国(上海)自由贸易试验区分账核算业务境外融资与跨境资金流动宏观审慎管理实施细则(试行)》)

Issuing authority: People’s Bank of China, Shanghai headquarters ("PBOC")