Foreign Investment Bulletin April, 2016（II）

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.
3.1Background
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.
3.2Legal 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.
3.3Next 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.