New regulation of foreign debits


Date:  2017-09-30    Autor:   Cokine WANG


Keyword: foreign debt financing, good news to high net assets company

It is well-know that the balance of short-term foreign loan and transaction amount of long-term foreign loan should not exceed the gap between total investment and the registered capital (hereinafter referred to as “GAP”), according to “Administrative Measures for Registration of Foreign Debts”. It is the only rule of foreign debits since a long time ago.

However, since from 3 May 2016, the People's Bank of China has published “Circular of the People's Bank of China on the Nationwide Implementation of Macro-prudential Management of Full-coveredCross-border Financing Activities”, which has break the only rule of “GAP”.Under the new regulation, a capital or net assets-based constraint mechanism for cross-border financings of micro entities shall be established under the macro-prudential rules. Under such mechanism, enterprises and financial institutions may carry out cross-border financings in RMB or foreign currencies at their own discretion in accordance with the provisions. The outstanding cross-border financings of an enterprise or financial institution (the drawdown but unpaid amount, hereinafter the same) shall be calculated using a risk-weight approach and shall not exceed the specified upper limit, namely:risk weighted outstanding cross-border financings ("FinancingOutstanding") ≤ the upper limit of risk weighted outstanding cross-border financings ("Financing Limit") (hereinafter referred to as “newmethod”). For the enterprise, the detailed formula should be as follows:

Financing outstanding = Σ outstanding amount of long term RMB and foreign currency denominated cross-border financings *1 +Σoutstanding amount of short term RMB and foreign currency denominated cross-border financings *1.5 +Σ outstanding foreign currency denominated cross-border financings *0.5

Financing limit = Net equity * 1 (cross-border financing leverage ratio) * 1 (macro-prudential adjustment parameter)

Therefore, since from 3 May 2016, the foreign invested enterprises could choose the new regulation as the limitation of foreign debts, instead of traditional “GAP” method. For those enterprises with high net equity but low GAP, they will no doubt choose the new method for foreign debts limitation calculation.

Furthermore, since from 12 January 2017, the People's Bank of China has updated the new method. The most important is torenewed the cross-border financing leverage ratio from 1 to 2, which means that Financing limit = Net equity * 2 (cross-border financing leverage ratio) * 1(macro-prudential adjustment parameter).

Therefore, since from 4 May 2017, the limitation of cross-border financing has been increased to 2 times of net equity of the enterprise.

In summary, we could illustrate the above two methods of foreign debts by the following table:

 

Approval/Record

Currency of foreign debts

Quota of foreign debts

GAP   method

Approval   by SAFE

RMB/   Foreign currency

Balance   of Short-term foreign loan + Transaction amount of Long-term foreign loan ≤   GAP between total investment and registered capital

New   method

Record   to SAFE

RMB/Foreign   currency

Σ   outstanding amount of long term RMB and foreign currency denominated   cross-border financings *1 +Σ outstanding amount of short term RMB and   foreign currency denominated cross-border financings *1.5 +Σ outstanding   foreign currency denominated cross-border financings *0.5≤net equity*2

We would like to draw your attention to the following two issues:

1.    The enterprises could only choose one of the above two methods. Once one method has been chosen, it could not be changed to the other.

2.    As the limitation of foreign debts might not be the GAP, and the balance of foreign debts could reach to 2 times of net equity, wecould like to remind the enterprise to pay attention to the issue of “Thin Capitalization”


If you have further interest in of the complete (9 newsletter issue, you can download the whole newsletter bulletin via the “PDF icon” at the right hand top/ bottom side(PDF