The People’s Bank of China (PBOC) issued the Pilot Scheme for Macro Prudential Management of Cross Border Financing within Expanded Parameters (《中国人民银行关于扩大全口径跨境融资宏观审慎管理试点的通知》) (the Pilot Scheme) which took effect on 25 January 2016. The Pilot Scheme is intended to implement a new macro prudential control system (which references the core capital or net assets of the applicable debtors) for cross border financing into China which is very different from the current foreign debt quota system.
The Pilot Scheme applies to certain eligible banks on a nationwide basis, and to eligible enterprises in a free trade zone at the initial stage. For these eligible entities, there will be a uniform regime for purely domestic and (on an opt-in basis) foreign invested banks/enterprises in respect of the ratio of foreign debt that can be incurred (with reference to core capital or net assets) in RMB or foreign exchange.
The text of the Pilot Scheme in Chinese is available at:
1. Cross border financing
The Pilot Scheme applies to cross border financings into China. The term “cross border financing” is defined to be financing in RMB or a foreign currency provided by a non-PRC entity or individual to a PRC entity.
2. To whom does the Pilot Scheme apply
The Pilot Scheme applies to the following PRC entities (as the borrower/debtor of cross border financing):
- Enterprises incorporated in one of the China (Shanghai) Free Trade Zone, China (Guangdong) Free Trade Zone, China (Tianjin) Free Trade Zone and China (Fujian) Free Trade Zone (each, an FTZ) (Eligible Enterprises).
An Eligible Enterprise must be a non-financial institution and excludes any government financing vehicle (政府融资平台) or real estate company.
- PRC incorporated banks included on the list attached to the PBOC Circular (Eligible Banks).
Currently, there are 27 Eligible Banks, including HSBC Bank (China) Company Limited, Standard Chartered Bank (China) Limited and Citibank (China) Limited. A list of the Eligible Banks is attached in Annex 1.
3. Key features introduced by the Pilot Scheme
Under the current regime, a PRC entity is required to obtain an annual quota or, in the case of a foreign invested enterprise (FIE), have sufficient foreign debt head room in order to incur foreign debts. For these purposes, FIE is an enterprise with foreign ownership of 25% or more.
The Pilot Scheme introduces different mechanisms to regulate cross border financings provided to eligible PRC entities.
Eligible Banks are required to make a filing with PBOC before they conduct cross border financing business pursuant to the new system under the Pilot Scheme (e.g. the filing covers information such as (for an Eligible Bank) the core capital of the bank and calculation of the weighted risk balance and weighted risk balance limit with respect to the bank). In addition, Eligible Banks are required to report to PBOC and SAFE after the signing but before the implementation of the relevant cross border financing transaction.
Eligible Enterprises are required to make a filing with SAFE in respect of the relevant cross border financing transaction after the signing of the transaction but no later than 3 working days before the drawdown. SAFE will issue implementation guidance on how to make a filing.
- New foreign debt limit
In place of the existing foreign debt quota/headroom, the Pilot Scheme introduces a macro prudential control system featuring a weighted risk balance and a weighted risk balance limit. In particular, the cross border financing transactions of a PRC entity will be factored into a “weighted risk balance”, and subject to a “weighted risk balance limit”, based on its core capital or net assets.
weighted risk balance ≤ weighted risk balance limit
Please see Annex 2 which includes details on how the weighted risk balance and the weighted risk balance limit are calculated with respect to an Eligible Bank or an Eligible Enterprise, each being the debtor under the relevant cross border financings provided to it.
4. Optional for FIEs or foreign invested banks
An Eligible Bank which is a foreign invested bank (i.e. a PRC incorporated bank with foreign ownership of 25% or more) or an Eligible Enterprise which is an FIE may choose to follow the new requirements (including the new macro prudential limit) under the Pilot Scheme OR the existing foreign debt quota/headroom system. It would be required to file its choice with PBOC/SAFE. Once the filing is submitted, the Eligible Bank or Eligible Enterprise is, in principle, not allowed to revert to the foreign debt quota/headroom system.
This would mean that Eligible Banks or Eligible Enterprises which have no foreign ownership or whose foreign ownership is less than 25% and thus not eligible to make a choice would be required to follow the Pilot Scheme starting from 25 January 2016.
List of Eligible Banks
- 国家开发银行 China Development Bank
- 进出口银行 Export-Import Bank of China
- 农业发展银行 Agricultural Development Bank of China
- 中国工商银行 Industrial and Commercial Bank of China
- 中国农业银行 Agricultural Bank of China
- 中国银行 Bank of China
- 中国建设银行 China Construction Bank
- 交通银行 Bank of Communications
- 中信银行 China CITIC Bank
- 中国光大银行 Everbright Bank
- 华夏银行 Huaxia Bank
- 中国民生银行 China Mingsheng Bank
- 招商银行 China Merchants Bank
- 兴业银行 Industrial Bank
- 广发银行 Guangfa Bank
- 平安银行 Ping An Bank
- 浦发银行 Pudong Development Bank
- 恒丰银行 Hengfeng Bank
- 浙商银行 Zheshang Bank
- 渤海银行 Bohai Bank
- 中国邮政储蓄银行 Postal Savings Bank of China
- 北京银行 Bank of Beijing
- 上海银行 Bank of Shanghai
- 江苏银行 Bank of Jiangsu
- 汇丰银行﹝中国﹞有限公司 HSBC Bank (China) Company Limited
- 花旗银行﹝中国﹞有限公司 Citibank (China) Limited
- 渣打银行﹝中国﹞有限公司 Standard Chartered Bank (China) Limited
Calculation of the “weighted risk balance” and “weighted risk balance limit”
in respect of an Eligible Bank or an Eligible Enterprise
(1) How to calculate the weighted risk balance?
weighted risk balance = Σ RMB financing balance x tenor risk ratio x class risk ratio + Σ foreign currency financing balance x exchange rate risk ratio
tenor risk ratio is set at 1 for mid-to-long term debts (with tenor exceeding 1 year) and at 1.5 for short-term debts
class risk ratio is set at 1 if it is an “on balance sheet” financing and at 0.2 or 0.5 if it is classified as an “off balance sheet” financing (or a contingent debt).
exchange rate risk ratio is set at 0.5
What is included and what is excluded?
The Pilot Scheme specifies that the debts incurred by an Eligible Bank or an Eligible Enterprise under cross border financings (whether in RMB or in a foreign currency and whether they are off balance sheet financings or on balance sheet financings) must be included in the calculation of weighted risk balance. However, financings incurred by the offshore subsidiaries or offshore branches of an Eligible Bank or an Eligible Enterprise need not be included.
The Pilot Scheme specifically sets out the following cross border financing transactions which are excluded when calculating the weighted risk balance of the Eligible Bank or Eligible Enterprise:
- passive debts in RMB including RMB debts incurred by an Eligible Bank or Eligible Enterprise resulting from an offshore entity investing in the onshore bond markets (i.e. holding bonds issued by the bank/enterprise) and RMB deposits placed by an offshore entity with an Eligible Bank;
- trade financings extended to an Eligible Enterprise for genuine cross border trade purposes;
- intra-company loans extended to an Eligible Enterprise according to intra-group cash pooling arrangements (which are set up to manage the cash arising from business operation and industrial investments) approved by regulators;
- panda bond proceeds lent by the offshore issuer to its onshore subsidiaries;
- interbank deposits taken by an Eligible Bank from its offshore affiliates or other foreign debts arising from intra-group transactions between the Eligible Bank and its offshore affiliates or branches; and
- if the proceeds of a cross border financing provided to an Eligible Bank or Eligible Enterprise was used to increase the capital of the bank or enterprise or if the debt owed under the above cross border financing was waived, the amount that was applied to increase the capital or the amount so waived will be excluded from calculation of the weighted risk balance in respect of the Eligible Bank or Eligible Enterprise.
Further clarification on “class risk ratios” for different classes of financings
The Pilot Scheme further provides that when calculating the weighted risk balance, the following classes of financings will be included according to the following methods ( note that this seems to clarify how class risk ratios (1, 0.2 or 0.5) above are determined):
- Trade financings in a foreign currency: trade financings which are denominated in a foreign currency and provided to an Eligible Bank or an Eligible Enterprise will be weighted at 20% and the tenor risk ratio of 1 shall apply when calculating the weighted risk balance.
- Off balance sheet financings (or contingent debts): contingent debts owed to an offshore entity by an Eligible Bank, (A) under a nei bao wai dai (i.e. onshore guarantee/security provided by an onshore entity to secure an offshore debt between an offshore debtor and an offshore creditor) provided by the Eligible Bank or (B) under a derivative transaction entered into by the Eligible Bank to hedge its client’s risks arising from the client’s need to hedge the currency or tenor related exposure to which the client’s assets and liabilities are subject under a genuine cross border transaction, will be weighted at 20% when calculating the weighted risk balance (in each case of (A) and (B)); a contingent debt owed by an Eligible Bank under a derivative transaction entered into between it and an offshore entity arising from the need to hedge its own currency or tenor exposure, will be weighted at 50% when calculating the weighted risk balance.
- Any other class of financing shall be calculated on an “as it is” basis, which seems to suggest that the class risk ratio would be 100% in this scenario.
(2) How to calculate the weighted risk balance limit?
weighted risk balance limit = core capital (if a bank) or net assets (if an enterprise) x financing leverage ratio x macro prudential ratio
core capital (i.e. tier 1 capital) or net assets shall be based on the latest audited financial report of the bank or enterprise, as the case may be
financing leverage ratio is set at 1 (if a bank) or at 0.8 (if an enterprise)
macro prudential ratio is set at 1
PBOC has the right to adjust the weights and ratios referred to in paragraphs (1) and (2) above according to the macro financial policies.