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17 February, 2017
On 26 January 2017, the State Administration of Foreign Exchange (“SAFE”) published its Notice to Further Promote the Reform on Foreign Exchange Administration and Improve the Verification of Authenticity and Compliance (国家外汇管理局关于进一步推进外汇管理改 革完善真实合规性审核的通知 (汇发【2017】3 号)) (the “SAFE Notice 3”) as well as its responses from the Q&A session (国家外汇管理局有关负责 人就进一步推进外汇管理改革完善真实合规性审核有关问题答记者问) (the “Q&A”) held in connection with the SAFE Notice 3.
In addition, on 11 January 2017, the People’s Bank of China (“PBOC”) published the Notice on Matters relating to the Macro-prudential Management Policy of Overall Cross-border Financing (中国人民银行关 于全口径跨境融资宏观审慎管理有关事宜的通知(银发【2017】9 号)) (the “PBOC Notice 9”).
The SAFE Notice 3 and the PBOC Notice 9, both which have immediate effect, implement further measures to reform and liberalise the onshore remittance of foreign debt.
Background
On 9 June 2016, SAFE published its Notice on Reforming and Standardising the Administrative Policies on Capital Account Foreign Exchange Settlement (国家外汇管理局关于改革和规范资本项目结汇管理政策的通知(汇发【2016】 16 号)) (the “SAFE Notice 18”) to ease its policies on the onshore remittance of foreign debt borrowed offshore.
Under the SAFE Notice 18, all Mainland entities (including both PRC-funded entities and foreign-invested entities) have been allowed to convert foreign debt borrowed offshore directly by them in their own names into RMB in the Mainland for their actual business (subject to the relevant SAFE registration requirements).
The SAFE Notice 18 therefore provided a clear legal basis for a PRC issuer/borrower to remit the proceeds from its direct offshore bond issuance/borrowing to the Mainland.
The SAFE Notice 18 did not, however, remove the prohibition on the onshore remittance of proceeds from offshore bond issuances and loans guaranteed by Mainland entities.
In addition, PBOC in April 2016 announced nationwide changes in PRC cross-border financing rules which introduced a new foreign debt quota system for both domestic PRC entities (other than government financing vehicles and real estate enterprises) and PRC foreign invested entities (“FIEs”) and expedited the filing requirements for PRC domestic entities (the “PBOC Notice 132”).
Key Impact of the new SAFE Notice 3 on Offshore Bond Issuances and Offshore Loans
In line with recent measures taken by the PRC authorities to encourage inbound investments and capital inflows, SAFE has further liberalised its policies to now specifically permit the onshore remittance of foreign debt guaranteed by PRC entities, including proceeds raised from guaranteed bonds and loans.
In addition, the SAFE Notice 3 specifically states that the proceeds from offshore guaranteed bonds and loans can be remitted onshore by way of loans or equity investments. We understand that the SAFE Notice 3 will also apply to the onshore remittance of guaranteed bonds or loans which are denominated in offshore Renminbi.
It is advisable that PRC entities proposing to issue/raise offshore guaranteed bonds/loans should ensure that the application made to the National Development and Reform Commission or its local counterpart (“NDRC”) for the Enterprise Foreign Debt Pre-Issuance Registration Certificate specifically mentions that the bond/loan proceeds will be used for onshore purposes.
The implementation of the SAFE Notice 3 should encourage more PRC issuers/borrowers to utilise a guarantee structure for their offshore bonds/loans rather than reverting to a keepwell structure. When compared to a keepwell structure, a guaranteed bond/loan structure will benefit from a higher credit rating from rating agencies but at the same time maintain the same tax benefits since bond/loan payments will in normal circumstances continue to be made through the offshore bond issuer or loan borrower entity (rather than the onshore PRC guarantor). At the same time, an offshore guaranteed bond/loan would also under normal circumstance be more tax efficient than a bond/loan directly issued/drawn down by a PRC issuer/borrower – although to take advantage of this structure, the PRC issuer/borrower would need to have an existing offshore subsidiary or be able to set up a new offshore subsidiary.
The overall purpose of the SAFE Notice 3 is aimed at boosting capital inflows and curbing capital outflows. In addition to the relaxation on remittance of proceeds from offshore guaranteed bonds/loans, the SAFE Notice 3 and the Q&A also include other measures, such as Mainland enterprises must now use the proceeds from their exports to repay foreign currency loans onshore, foreign institutions in the free trade zones may now settle foreign currency loans onshore etc. At the same time, the compliance procedures of overseas investments by PRC enterprises for example, are now more stringent. It remains to been seen whether the PRC relevant regulators will use the SAFE
Notice 3 as a mean to “encourage” PRC issuers/borrowers to remit onshore the proceeds from offshore guaranteed bonds/loans.
However, whilst the SAFE Notice 3 and the Q&A give greater clarity to the onshore remittance of the proceeds from offshore guaranteed bonds/loans, there are some questions that remain unanswered (see below). It is important to consult with local SAFE until a clear practice is established.
> Although the SAFE Notice 3 and the Q&A state that the proceeds from offshore guaranteed bonds and loans can be remitted onshore by way of loans or equity investments in accordance with existing regulations, it is unclear whether there will be additional measures to allow the proceeds to be remitted onshore directly or by other means. Also, the Q&A states that onshore remittance by way of foreign debt should comply with the existing foreign debt registration procedures, it is unclear whether any new or additional procedure would be required. The issuers/borrowers should confirm with their local SAFE on the exact filing requirements for the onshore remittance of the proceeds from an offshore guaranteed bond or loan.
> The Q&A further states that the relaxation will be implemented in accordance with PBOC’s macro-prudential management framework, therefore, the amount guaranteed by the PRC guarantor may also be counted towards the guarantor’s foreign debt quota (with a risk weighting of 20% if the guarantor is a financial institution who provides “Neibaowaidai” loans to its clients and 100% if the PRC guarantor is a Mainland enterprise). We suggest it would be prudent for issuers/borrowers to confirm if the amount guaranteed will be counted towards the PRC guarantor’s foreign debt quota with their local SAFE.
> The SAFE Notice 3 and the Q&A make no mention of other existing requirements under Regulation on Foreign Exchange Administration of Cross-border Guarantee and Security (跨境担保外汇管理规定(汇发【 2014】29 号)) and its operational guidelines for offshore guaranteed bond issuance (i.e. PRC guarantor must have a direct/indirect ownership interest in the bond issuer and proceeds must be used for an offshore project approved by NDRC) and whether these other requirements continue to apply. It would be prudent to also consult with local SAFE to confirm if these other requirements would still apply if the proceeds from an offshore guaranteed bond were remitted onshore. For example, if the proceeds will be remitted onshore entirely, it would seem unnecessary to require either the bond issuer or the bond issue to have any connection with an approved offshore investment.
Key Impact of the new PBOC Notice 9 on PRC cross-border financing
Similarly, the new PBOC Notice 9 should be viewed as a further step to further liberalise the cross-border financing rules for both domestic PRC entities (which include PRC companies and PRC financial institutions but excludes PRC government financing vehicles and PRC real estate enterprises) and FIEs (which include foreign invested companies and foreign- funded financial institutions) in order promote inbound investments and capital inflows using proceeds raised offshore.
The new PBOC Notice 9 re-emphasises the foreign debt quota requirements that PRC entities and FIEs are required to comply with as well as restates substantially all of the prudential measures from the previous PBOC Notice 132. It is also now clear that the PBOC cross-border financing rules do not affect the existing NDRC requirements for the Enterprise Foreign Debt Pre-Issuance Registration Certificate and issuers/borrowers will need to continue to comply with both the NDRC and PBOC rules.
The PBOC Notice 9, however, includes the following noteworthy amendments:
> Revised foreign debt limit: Under the PBOC Notice 9, the foreign debt limit for PRC companies and foreign invested companies has been increased to 2x the borrower’s net assets (previously it was only 1x under the PBOC Notice 132). The foreign debt limit for PRC non- bank financial institutions and PRC and foreign-funded banks remains unchanged. Whilst the increased foreign debt limit for PRC companies and foreign invested companies is expected to spur further offshore bond issuances and loan borrowings from these issuers/borrowers, it is also likely that these issuers/borrowers will continue to be encouraged to remit the proceeds from such bond issuances and loan borrowings back into the PRC.
> Revised risk weighting and exemptions: The PBOC Notice 9 makes certain amendments to the risk weighting to, and the exemptions from, the foreign debt limit calculation (e.g. reduction of risk weighting of “Neibaowaidai” loans provided by PRC financial institutions to their clients from 100% to 20% and inclusion of a specific exemption for trade factoring) to increase the available foreign debt limit to PRC entities and FIEs.
> Transitional Period for FIEs: The PBOC Notice 9 has also set a one year transitional period (ending 11 January 2018) whereby foreign- funded financial institutions and foreign invested companies can still opt into the new regime introduced by the PBOC Notice 132/PBOC Notice 9 or remain under the previous foreign debt quota regime. After the one year transitional period expires, foreign-funded financial institutions will be automatically transferred to the new regime under the PBOC Notice 9 but foreign invested companies who have not opted for the new regime will need to wait for further clarification from PBOC and SAFE after the transitional period. Given the increased foreign debt limit for foreign invested companies under the new regime and the ability to “refresh” the foreign debt limit calculation based on the prevailing outstanding debt and net assets of the borrower, we would expect most foreign invested companies will opt to raise cross-border funds using the new regime under the PBOC Notice 9.
> Filling Procedures: The filling procedures set out in the previous PBOC Notice 132 remain unchanged. PRC companies are still required to file with SAFE after the relevant financing agreement is signed and no later than three working days before completion of the issuance/drawdown. PRC financial institution issuers/borrowers are required to file the details of the calculation of their outstanding foreign debt and foreign debt limit with PBOC and SAFE before making their first cross-border financing transaction and thereafter to report to PBOC and SAFE when each financing agreement is signed and before completion of the relevant issuance/drawdown. From a practice perspective, the issuers/borrowers should still check with SAFE/PBOC on the implementation of such filling procedures and documents required for filling as this filling procedure is still a relatively new development.
For further information, please contact:
William Liu , Partner, Linklaters
william.liu@linklaters.com
