New PBOC Circular potentially raises the overseas borrowing ceiling for borrowers in China: but is it a game changer?

On 11 January 2017, the People's Bank of China ("PBOC"), China's central bank, issued the People's Bank of China Circular on Matters relating to the Full Bore Macroprudential Administration of Cross-Border Financings ("New PBOC Circular"). The stated aims of the New PBOC Circular are to further expand the space in which enterprises and financial institutions can engage in cross-border financing, facilitate the full deployment of overseas low-cost overseas capital, and lower 'real economy' financing costs.

Foreign Debt Quota System

The so called "Full-bore Macroprudential administration of overall cross-border financing" ("Foreign Debt Quota System") was initially launched in the China (Shanghai) Pilot Free Trade Zone in early 2015. 

Changes introduced by the New PBOC Circular

The New PBOC Circular contains a number of changes, mainly designed to enlarge the borrowing capacity of PRC borrowers' in terms of incurring foreign debts.

Under the New PBOC Circular, companies (excluding government financing platforms and real estate enterprises) and financial institutions with legal person status incorporated in the PRC (collectively, "PRC Borrowers") are permitted to incur foreign debts, provided that the PRC Borrower's cross-border financing risk-weighted balance does not exceed its individually calculated cross-border financing risk-weighted balance ceiling.

Transitional Provisions

The New PBOC Circular took effect on issue, however RMB and foreign currency overseas financings and other such innovative regional cross-border financing pilot programs adopted by the PBOC and the State Administration of Foreign Exchange pursuant to the New PBOC Circular will enter into force on 4 May 2017.

Foreign Invested Enterprises (excluding foreign-invested real estate enterprises)  and foreign financial institutions are granted a one-year transitional period from the date of issue of the New PBOC Circular.

A game changer? 

Overall, this is clearly an upgrade and a more sophisticated system that will allow domestic capital companies to borrow more freely overseas. For FIEs, it makes much more sense to borrow based on risk-weighted assets rather than fixed debt-equity ratios which take no account of ability to finance, but the big question is whether this development will open the door to FIEs borrowing more from overseas and leverage-based transactions.

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