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1 June, 2016
The National Development and Reform Commission proposed to re-modify the Administrative Measures for the Approval and Record-filing on Outbound Investments Projects to relax approval requirements for outbound investment projects.
To support the development of technology start-ups, the China Banking Regulatory Commission, the Ministry of Science and Technology and the People’s Bank of China jointly released the Guiding Opinions on Supporting the Banking Financial Institutions in Strengthening Innovation and Carrying out “Investment and Loan Linkage Mechanism” Pilot Programs on Technology Start-ups to encourage banking financial institutions joining the pilot programs to launch the “investment and loan linkage mechanism” with qualified technology start-ups.
The People’s Bank of China issued the Circular on Implementing Overall the Macro-prudential Management System on Nationwide Cross-border Financing, where the pilot programs for overall macro-prudential management system on cross-border financing denominated in RMB and foreign currency have been extended nationwide. Domestic and foreign-invested financial institutions and non-financial enterprises are allowed to access more financing channels and lower their financing costs by virtue of their own capital strength.
1. NDRC Proposes to Re-modify the Administrative Measures for the Approval and Record-filing on Outbound Investments Projects
To further facilitate outbound investments, on April 13, 2016, the National Development and Reform Commission (the “NDRC”) published a consultation paper seeking public comment on the amendments proposed for the Administrative Measures for the Approval and Record-filing on Outbound Investments Projects (“Regulation No. 9”) which have been enforced since May 8, 2014.
1.1 Background
Regulation No. 9 adopts two separate management methods of approval and record-filling on outbound investments projects according to the identity of the investor, the amount of the investment, the country or region and the industry invested. Outbound investment projects where the amount of the investment by the Chinese investor is USD 1 billion or more are subject to approval by the NDRC; outbound investment projects involving sensitive countries and regions or sensitive industries, regardless of amount invested, are subject to approval by the NDRC; including if the amount of the investment by the Chinese investor is USD2 billion or more as well as the outbound investment projects involve sensitive countries and regions or sensitive industries, the NDRC will submit its opinion for the State Council to approve. “Sensitive countries and regions” include those having no diplomatic relations with China, those subject to international sanctions, and also those in wars, civil strife, and other disturbances. “Sensitive industries” include basic telecommunications operations, cross-border development and utilization of water resources, large-scale land development, main power transmission lines and power grids, and news media industries.
Except for the abovementioned projects, other outbound investment projects are subject to record-filing procedures, where the filing authorities are dependent on the identity of the investor and the amount of the investment. Projects undertaken by centrally-administered state-owned enterprises and projects undertaken by local enterprises where the amount of the investment by the Chinese investor is USD 300 million or more shall be filed with the NDRC; projects undertaken by local enterprises where the amount of the investment by the Chinese investor is less than USD 300 million shall be filed with the NDRC’s provincial counterparts.
On October 31, 2014, the State Council published the Catalogue of Investment Projects Subject to Government Approval (2014 Edition) which simplified the approval requirements for outbound investment projects so that projects involving sensitive countries and regions are subject to approval by the competent investment department of the State Council. Other projects undertaken by centrally-administered state-owned enterprises and projects undertaken by local enterprises where the amount of the investment by the Chinese investor is USD 300 million or more shall be filed with the competent investment department of the State Council.
On December 27, 2014, NDRC amended provisions relating to approval power in Regulation No. 9 according to the Catalogue of Investment Projects Subject to Government Approval (2014 Edition) so that outbound investment projects involving sensitive countries and regions and sensitive industries are subject to approval by the NDRC, among which, if the amount of the investment by the Chinese investor is USD 2 billion or more, the NDRC shall submit its opinion for the State Council to approve.
On April 13, 2016, NDRC published a consultation paper seeking public comment on the amendments proposed for Regulation No. 9, where seven articles are proposed to be revised, including rules concerning the approval of projects.
1.2 Legal Review
The most notable highlight of the amendments proposed for Regulation No. 9 is that the project approval procedures are simplified.
First of all, the consultation paper proposed to drop the requirement for projects where the amount of the investment by the Chinese investor is USD 2 billion or more are subject to State Council’s approval. Such a provision on approval power has been simplified so that outbound investments projects involving sensitive countries, regions and industries shall be approved by the NDRC. Given that the Regulation No. 9 merely stipulated the time limit for the NDRC to grant approval, without stipulating the time limit for State Council to grant approval, it was not previously possible to estimate the time needed for obtaining State Council’s approval. Now that the requirement for State Council’s approval has been dropped in the consultation paper and only the time limit requirement of 30 days for the NDRC to grant approval has been retained, it becomes possible to estimate the time needed for obtaining approval. Additionally, the consultation paper removed relevant provisions requiring the NDRC to submit its opinions for the State Council to approve.
Secondly, the consultation paper dropped the requirement for the NDRC’s provincial counterparts to conduct preliminary review of the projects to be submitted for the NDRC’s approval. The procedures have been simplified so that the local enterprises directly submit the project application to the NDRC provincial counterparts, and the NDRC provincial counterparts will submit the same for the NDRC’s approval.
Another highlight of the amendments proposed for Regulation No. 9 is that business operations matters within the discretion of enterprises such as fundraising are no longer pre-conditions for obtaining outbound investments projects approval, which means a bank’s letter of intent of fundraising is no longer required for submitting an application for outbound investments projects.
1.3 Next Steps
The consultation period for the amendments proposed for Regulation No. 9 ended on May 13, 2016. The progress in the amendment of Regulation No. 9 is worth our continued attention.
2. Encouraging the Pilot Banking Financial Institutions to Carry out Investment and Loan Linkage Mechanism with Qualified Technology Start-ups
On April 21, 2016, the China Banking Regulatory Commission (the “CBRC”), the Ministry of Science and Technology, and the People’s Bank of China (the “PBOC”) jointly released the Guiding Opinions on Supporting the Banking Financial Institutions in Strengthening Innovation and Carrying out “Investment and Loan Linkage Mechanism” Pilot Programs on the Technology Start-ups (“Guiding Opinions on Investment and Loan Linkage”) to encourage banking financial institutions including foreign-invested banks joining the pilot programs to launch the “investment and loan linkage mechanism” with qualified technology start-ups (“Technology Start-ups”). This is a major breakthrough for the existing rule that “commercial banks shall not invest in the non-banking financial institutions and enterprises” as prescribed in the Law of Commercial Banks and it is expected to have a great significance on the future business development model of banking financial institutions.
2.1 Background
According to the Commercial Bank Law of 1995, commercial banks shall not invest in the non-banking financial institutions and enterprises in China. When the Commercial Bank Law was modified in 2003, an exception “unless otherwise provided by the State Council” was added to the rule “commercial banks shall not invest in the non-banking financial institutions or enterprises in China” for the purpose of leaving a door open for the commercial banks to have an alternative investment channel, and leaving the investment of commercial banks in non-banking financial institutions and enterprises in China to the State Council’s discretion.
On March 13, 2015, the State Council proposed in the Opinions on Deepening the Reform of Systems and Mechanisms to Accelerate the Implementation of Innovation-driven Development Strategies to improve the relevant commercial bank laws, select qualified banking financial institutions, explore pilot financing services models conjoining equity and debt for enterprises’ innovative activities, and carry out investment and loan linkage mechanism with venture capital and equity investment institutions.
On April 21, 2016, the CBRC, Ministry of Science and Technology, and PBOC jointly released the Guiding Opinions on Investment and Loan Linkage to encourage banking financial institutions joining the pilot programs to launch the “investment and loan linkage mechanism” with the Technology Start-ups. Five independent innovation demonstration zones in different districts and 10 pilot banking financial institutions were selected for the first batch of investment and loan linkage pilot projects.
2.2 Legal Review
The investment and loan linkage refers to the financing pattern that the banking financial institutions link the supply of credit with the equity investments made by their investment subsidiaries, through the relevant systematic arrangement of which, the investment income offsets the credit risk, the credit risks of the Technology Start-ups match the income of investment and the Technology Start-ups are provided with sustained funding support.
The investment and loan linkage pilot projects are adopted for the pilot banking financial institutions to carry out investment and loan linkage mechanism with qualified Technology Start-ups in the pilot zones.
The first batch of five pilot zones, namely Beijing Zhongguancun National Independent Innovation Demonstration Zone, Wuhan East Lake National Independent Innovation Demonstration Zone, Shanghai Zhangjiang National Independent Innovation Demonstration Zone, Tianjin Binhai National Independent Innovation Demonstration Zone, and Xi’an National Independent Innovation Demonstration Zone, located in Beijing, Wuhan, Shanghai, Tianjin and Xi’an respectively, were selectively chosen from the 14 independent innovation demonstrations zones approved by the State Council.
The selection of pilot banking financial institution is made upon the selection of pilot zones. The first 10 pilot banking financial institutions cover the policy bank (i.e. China Development Bank), state-owned bank (i.e. Bank of China), joint-equity commercial bank (i.e. HENGFENG BANK), private bank (Shanghai Huarui Bank), city commercial banks situated in the pilot zones (Bank of Beijing, Bank of Hankou, Bank of Shanghai, Bank of Tianjin and Bank of Xi’an), and SPD Silicon Valley Bank, which is a foreign-invested bank focused on serving Technology Start-ups. Among the abovementioned institutions, those national banks like China Development Bank, Bank of China, and HENGFENG BANK can launch the pilot projects in the five national independent innovation demonstration zones as mentioned above according to their branch establishments; SPD Silicon Valley Bank can launch the pilot projects within its current business scope through its existing institutions; and five city commercial banks can launch the pilot projects in the national independent innovation demonstration zones where they have established institutions.
The pilot banking financial institutions shall establish investment subsidiaries in China, through which the equity investment is made. The subsidiaries shall make equity investment in the Technology Start-ups using its own funds and are not allowed to use borrowed funds, agency funds, entrusted funds or any other forms of non-self-owned funds. The investments in a single Technology Start-up shall not exceed 10% of the self-owned funds of the investment subsidiary. The subsidiary shall play the role of financial investor to choose to make the equity investment in non-listed Technology Start-ups in the initial stage, growth stage and development stage, enjoy the investment returns, and bear the corresponding risks.
The pilot banking financial institutions shall also establish the technology specialized financial institutions and branches (“Technology Specialized Financial Institutions”) serving Technology Start-ups according to Regulatory Guidelines on Chinese Commercial Banks Specialized Institutions, dedicated to supplying credit to Technology Start-ups in connection with equity investment. Apart from granting loans, Technology Specialized Financial Institutions may also provide Technology Start-ups with one-stop and systematic financial services including settlement services, financial advisor services and foreign exchange services. When the banks offer credit to Technology Start-ups, the loans shall be from the on-balance-sheet asset rather than off-balance-sheet asset such as investing capital, entrusted funds and agency funds.
2.3 Next Steps
The Guiding Opinions on Investment and Loan Linkage merely provide principles on the investment and loan linkage mechanism for pilot banks. The provincial or municipal banking regulatory bureaus shall make specific plans for their governing pilot banking financial institutions to carry out the investment and loan linkage mechanism, and the pilot banking financial institutions shall also submit the pilot proposals to the regulatory authorities. In respect to specific issues such as how the banks establish new investment subsidiaries, whether foreign-invested banks shall also be subject to the Regulatory Guidelines on Chinese Commercial Banks Specialized Institutions when setting up Technology Specialized Financial Institutions, and whether the investment scope and industry of the investment subsidiaries established by banks shall be further opened, close attention shall continue to be paid to the further details of the pilot plans and operation guidelines on administrative approval expected to be issued by the CBRC and the local banking regulatory bureaus.
3. The Pilot Program for Overall Macro-prudential Management System on Cross-border Financing Has Been Extended Nationwide
On April 29, 2016, PBOC issued the Circular on Implementing Overall Macro-prudential Management System on Nationwide Cross-border Financing (the “Circular”), where the policy for overall macro-prudential management system on cross-border financing has been extended nationwide, based on earlier experiences in implementing regional and local pilot programs. The Circular introduced macro-prudential management tools for the country to manage capital flow and control cross-border financing. Meanwhile, under the management framework as set out in the Circular, domestic and foreign-invested financial institutions and non-financial enterprises are allowed to access more financing channels and lower their financing costs by virtue of their own capital strength.
3.1 Background
For many years, Chinese regulatory authorities adopted separate approaches for managing domestic institutions’ cross-border financing denominated in RMB and foreign currency, and established multiple management systems according to various factors, such as the nature of financing participants and financing cycle. Under the previous regulatory system, channels to obtain overseas funding for most domestic institutions were limited, and the co-existence of multiple management systems brought no benefits for regulatory authorities to gain knowledge of the level of cross-border financing which corresponds to the macroeconomic prosperity index, the overall debt-paying ability and the international balance of payment.
In February 2015, the Shanghai head office of the PBOC issued the Circular on Issuing the Implementing Rules for Macro-prudential Management of Overseas Financing and Cross-border Capital Flows in Separate Accounts in China (Shanghai) Pilot Free Trade Zone (for Trial) (Yin Zong Bu Fa [2015] No. 8, the “Implementing Rules”). According to the Implementing Rules, domestic non-financial enterprises and financial institutions within the Shanghai Pilot Free Trade Zone may receive overseas funding via the free trading accounts based on their own business demands, and are no longer required to first file an application for foreign debt quota with the PBOC and foreign exchange authorities. While the Implementing Rules apply in a single pilot region, the PBOC issued the Notice on Extending Pilot Regions for Implementing Overall Macro-prudential Management System on Cross-Border Financing on January 22, 2016 (Yin Fa [2016] No. 18, the “Circular No. 18”), where the overall macro-prudential management system on cross-border financing which integrates management of RMB and foreign currency is extended to apply to (i) 27 specified financial institutions; and (ii) non-financial enterprises and financial institutions registered in four Pilot Free Trade Zones in Shanghai, Tianjin, Guangzhou and Fujian.
3.2 Legal Review
Publication of the Circular further extends the implementation of overall macro-prudential management system on cross-border financing, as set out in the Circular No. 18, to a national level and modifies the existing management system where each cross-border financing and its quota require prior approval, and sets a risk-assessed cross-border financing limit which is based on the capital and net assets of each financial institution and non-financial enterprise. The PBOC and foreign exchange authorities will adjust and control the volume and structure of cross-border financing by adjusting weighted coefficients, such as the cross-border financing leverage ratio, macro-prudential adjustment parameters and various risk factors, so as to control the systematic financial risks.
The Circular marks a significant reform of cross-border financing management, and establishes macro-prudential management system on cross-border financing which are based on the dynamic capital strength and adjustment of total volume. Once the Circular is carried out, non-financial enterprises and financial institutions nationwide will enjoy greater discretion and a more relaxed administrative regulatory environment when receiving funding denominated in RMB or foreign currency. Highlights of the Circular include:
a. Cross-border financing of domestic financial institutions and non-financial enterprises no longer requires a pre-approved quota. According to the Circular, after signing contracts for cross-border financing and no later than 3 working days prior to withdrawals, enterprises shall submit a filing through the Information System of Capital Accounts with the State Administration of Foreign Exchange (the “SAFE”) to record the signing of a cross-border financing contract. Before conducting cross-border financing for the first time, financial institutions shall calculate the risk-assessed cross-border financing balance and risk-assessed cross-border financing limit and report the detailed calculation process to the PBOC and the SAFE.
b. Compared to the existing cross-border financing regulations, the Circular provides that the risk-assessed cross-border financing limit shall be calculated with the base of net assets of the non-financial enterprises or capital of financial institutions. If enterprises carry out cross-border financing within the limit, the financing quota of the non-financial enterprises and financial institutions could be greatly increased.
c. Non-financial enterprises may use foreign exchange funds after conducting foreign exchange settlements on the basis of actual demand, which will broaden the use of financed funds. Financial institutions may also use foreign exchange funds after foreign exchange settlement subject to the SAFE approval.
d. The Circular adopts an integrated management of multiple cross-border debts, reducing management costs of non-financial enterprises and financial institutions. In the meantime, the scope of management of the PBOC and foreign exchange authorities will be clarified according to the regulated market participants, from which non-financial enterprises and financial institutions will benefit.
3.3 Next Steps
As the regulatory body under the Circular, the SAFE is expected to issue relevant regulations. In particular, the Circular distinguishes duties of the PBOC and the SAFE and enterprises are required to conduct cross-border financing
accordingly, details of which are to be specified in the SAFE’s implementation rules in the future. Before issuance of such implementation rules, enterprises could only conduct certain cross-border financing, such as borrowing of foreign debts according to the current regulations of the PBOC and the SAFE. In addition, although the Circular did not specify whether the SAFE is required to issue further implementation rules on cross-border financing for financial institutions other than the 27 banks directly supervised by the PBOC, it is still worth noting whether the SAFE will issue relevant implementation rules and supplemental regulations to the Circular in the future.
For further information, please contact:
Catherine Miao, Partner, Jun He
miaoqh@junhe.com
