15 May, 2016
I. Background
On 22 January 2016, the People’s Bank of China (“PBOC”) published the Notice on Expanding the Trial Implementation of Full-blown Macro Prudential Administration of Cross Border Financing (《中国人民银行关于扩大全口径 跨境融资宏观审慎管理试点的通知》, Yin Fa No. 2016-18, the “Notice 18”) for the expansion of the new macro prudential administrative regime on inbound financing to the four free trade zones in China, which was first introduced in the Shanghai Free Trade Zone in early 2015.
On 29 April 2016, PBOC published the Notice on the Nationwide Implementation of Full-blown Macro Prudential Administration of Cross Border Financing (《中国人民银行关于在全国范围内实施全口径跨境融资 宏观审慎管理的通知》, the “Notice”1). The Notice, effective from 3 May 2016, further expands the new macro prudential administrative regime on inbound financing (the “New Regime”) on a nationwide basis.
For the purpose of this Client Alert, “inbound financing” refers to the term “跨境融资” as used in the Notice, which means financing provided by an entity located outside the PRC (each, an “offshore lender”) to a person located in the PRC. We do not use the expression “cross border financing”, as the Notice does not regulate financing provided by an onshore entity, as lender to an offshore entity, as borrower.
II. Key Changes and Features
Under the New Regime, subject to compliance with the requirements set forth in the Notice, the 27 banks listed in the schedule to the Notice, other financial institutions regulated by the relevant regulators in China and the enterprises established in China (whether they are PRC domestic enterprises or foreign invested enterprises (“FIE”)) (each, an “Onshore Borrower”) may obtain inbound financing from offshore lenders, without any prior approval from PBOC or the State Administration of Foreign Exchange (“SAFE”). It is also worth noting that the Notice does not apply to the governmental financing platforms or real estate enterprises. As such, the current restrictions that apply to real estate enterprises remain in force.
While the Notice applies to most enterprises in China, it leaves some flexibility for FIEs and foreign invested financial institutions, so that they may elect to continue to follow the rules applicable to the existing foreign debt regime by relying on the borrowing gap available (in the case of a FIE borrower) in calculating the amount of foreign debt that they may incur (the “Current Regime”) or the New Regime. The election should be filed with PBOC and SAFE which, in principle, may not be changed unless approved by PBOC and SAFE. The Notice does not prescribe the exact timeframe for such election, although we believe that this could be dealt with in the implementing rules that are yet to be issued by SAFE.
• Calculation of Borrowing Headroom
Under the New Regime, an Onshore Borrower may obtain inbound financing provided that the Outstanding may not exceed the Ceiling.
Outstanding means, in respect of an Onshore Borrower, the sum of the amount drawn but not yet repaid under each of its inbound financings (with risks pertaining to the tenor, type and exchange rate of each such inbound financing taken into account), which is calculated as follows:
Outstanding = ΣR&F Financing × TRM × CRM + ΣFX Financing × ERM
whereas:
R&F Financing means in respect of an inbound financing, the outstanding principal amount of such financing, whether denominated in RMB or foreign currencies;
TRM means, in respect of an inbound financing, the term risk conversion multiplier, which is:
(i) one (1) if the term of such financing exceeds one year, or
(ii) one point five (1.5) if the term of such financing is one year or below;
CRM means, in respect of an inbound financing, the category risk conversion multiplier, which is currently set as one (1), whether or not such financing is on-balance sheet or off- balance sheet;
FX Financing means the outstanding amount of an inbound financing denominated in a foreign currency; and
ERM means the exchange rate risk conversion multiplier, which is set as zero point five (0.5).
Please note the use of “Σ” in calculating the Outstanding, which means that each inbound financing (whether denominated in RMB or foreign currencies) and each foreign currency denominated inbound financing should be multiplied by the above relevant multiplier(s) in order to compute the Outstanding of an Onshore Borrower.
When calculating an R&F Financing and an FX Financing:
(a) if such R&F Financing or FX Financing is a trade finance transaction denominated in a foreign currency2, only 20% of the financing amount would be taken into account, and the TRM is fixed at one (1) regardless of the length of the tenor; or
(b) in case where an Onshore Borrower is a financial institution (“FI”), for any of its off-balance sheet financing (including contingent liabilities arising from Nei Bao Wai Dai or hedging services provided to customers), the outstanding amount of such off-balance sheet financing should be calculated on a fair value basis;
(c) for any other types of financing, the risk weight should be determined with reference to the actual circumstances of such financing.
Ceiling means the maximum amount of Outstanding permitted under the Notice, which is calculated as follows:
Ceiling = Capital / NAV × LR × MP
whereas:
Capital / NAV means, in respect of an Onshore Borrower, the amount of its net asset value (if such Onshore Borrower is a non-FI), or tier one capital (if such Onshore Borrower is a banking FI) or paid-up capital plus capital reserve (if such Onshore Borrower is a non-banking FI), each as determined with reference to such Onshore Borrower’s then most recent audited financial statements;
LR means the cross border financing leverage ratio, which is:
(a) one (1) for non-FI and non-bank FI or
(b) zero point eight (0.8) for FI which is bank; and MP means the macro prudent adjustment multiplier, which is set at one (1).
Please note that PBOC may adjust the relevant multipliers and calculation methods from time to time, either generally or with respect to particular enterprise or industry. We note that, under the Notice 18, the CRM applicable for off-balance sheet inbound financing was set at zero point two (0.2) or zero point five (0.5) whereas the same has been adjusted to one (1) under the Notice. This shows that PBOC has actively used these policy tools to regulate the flow of capital in light of changing economic and financial circumstances.
• Excluded Types of Debt
The following types of debt are excluded from calculating the Outstanding:
passive RMB debt, which includes (a) RMB debts arising from investment in onshore securities market by an offshore entity and (b) RMB deposit of an offshore entity with an onshore financial institution;
trade credit and RMB trade finance, which includes trade credit under genuine cross border trade transactions, RMB trade finance provided by an offshore financial institution and all types of RMB trade finance incurred by a financial institution for settlement under a genuine cross border trade transaction;
intra-group fund transfer, which is the debt owed by an onshore group member to an offshore group member under a duly filed intra-group cross border cash concentration management arrangement;
4. debts owed by an FI to a foreign debtor based on an offshore interbank deposit or fund transfer between affiliated banks or institutions;
5. Panda Bonds for self-use, which includes inbound lending from a foreign parent to its domestic subsidiaries funded with the proceeds of an onshore RMB bond issuance by the parent; and
6. debts to the extent converted to equity or waived.
• Streamlined Filing Procedure
Under the Notice, a non-FI Onshore Borrower:
1. should file its inbound financing with SAFE capital account information system (资本项目信息系统) no later than three business days before the drawdown. While under the Current Regime, the borrower is required to register the loan agreement with SAFE within 15 business days after the date of the loan agreement; and
2. should update its inbound financing and other relevant data (such as details of the offshore lender, tenor of the loan , amount of the loan, interest rate and its net assets value) with SAFE on an annual basis. For any change to its audited net assets value or certain terms of the financing agreement (such as offshore creditor, tenor of the loan, amount and interest rate), the borrower should promptly update SAFE.
• Use of Proceeds
The Notice states that non-FI Onshore Borrowers may convert the FX proceeds of their inbound financing into RMB to meet their actual needs, provided that the proceeds are used for the borrower’s own manufacturing or operating activities and the usage is also in line with applicable laws and the macro-prudential industry regulatory policies of China and the relevant free trade zones. It remains to be seen whether this will further open up the possibility of non-FI Onshore
Borrowers using FX inbound financing to repay their existing RMB onshore debts.
III. Detailed Implementation Rules Awaited
According to the Notice, SAFE will enact detailed implementation rules applicable to inbound financings by non-FI Onshore Borrowers. In addition, for those Onshore Borrowers which are FIE or foreign invested financial institutions, there will be further stipulations to the tenor of,
and the relevant arrangements to be made during, the transition period. As such, the full and practical extent of the Notice’s impact on foreign invested Onshore Borrowers is yet to be ascertained until further notice or implementing rules are published by SAFE or PBOC. Under the prevailing market condition, given that there has been limited inbounding financing to foreign invested Onshore Borrowers since late 2015 and most Onshore Borrowers are tapping the onshore market for funding, the immediate effect of the Notice may not be obvious.
1 While Notice 18 and the Notice refer to “cross-border financing”, they basically regulate inbound financing only but not vice versa.
2 Trade finance denominated in RMB is not included. Please see further clarification Excluded Types of Debt below.
For further information, please contact:
Simon Leung, Partner, Baker & McKenzie
simon.leung@bakermckenzie.com
