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LEGAL: PBOC Further Loosened the Cross-border Financing Rules
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PBOC Further Loosened the Cross-border Financing Rules

By Manuel Torres (Managing Partner of Garrigues China), Lucy Luo (Principal Associate), Xuezhou Chen (Corporate Associate)

BT 201704 LEGAL 01The People's Bank of China ("PBOC") has recently released the Circular on Matters relating to the Macro-prudential Management of Full-covered Cross-border Financing ("Circular 9") on January 12th, 2017, which replaces the Circular on the Nationwide Implementation of Macro-prudential Management of Full-covered Cross-border Financing Activities ("Circular 132") issued by PBOC last year and further updates relevant rules of full-covered cross-border financing.


1. Cross-border Financing Leverage Ratio


Under macro-prudential management of full-covered cross-border financing, in general, the "Cross Border Financing Risk Weighted Outstanding" ("Financing Outstanding") and "Upper Limit of Cross Border Financing Risk Weighted Outstanding" ("Financing Limit") constitute two main features. The Financing Outstanding refers to the aggregate amount of outstanding debts in RMB and foreign currency after multiplying the risk weight. And Financing Limit is the product of net assets (or the capital) , cross border financing leverage ratio and the macro prudent adjustment parameter. The Financing Outstanding shall not exceed Financing Limit.


Circular 9 increases cross-border financing leverage ratio for Enterprises (to be defined below) from 1 to 2 while keeping the macro prudent adjustment parameter for Enterprises as 1. Therefore, the Financing Limit of Enterprises has been raised from the same size of their net assets to two sizes of the same.


BT 201704 LEGAL 022. Applicable Scope


In addition to financial institutions ("Financial Institution") and non-financial enterprises (excluding government financing platforms and real estate enterprises)("Enterprises"), Circular 9 extends its application to domestic branches of foreign banks (applying mutatis mutandis to banks in Hong Kong, Macao and Taiwan regions). Unless specially stated, the relevant policy arrangement for foreign-invested banks under Circular 9 shall apply mutatis mutandis.


3. Debts Excluded from/Included in Calculating Financing Outstanding


Regarding the types of debts to be excluded from calculating the Financing Outstanding as compared to Circular 132, Circular 9 further provides that:


- Other than passive debts in RMB of Enterprises and Financial Institutions arising from offshore entities' investment in domestic bond market and RMB deposits of offshore entities placed in Financial Institutions, passive debts and deposits in foreign currency shall be excluded. In addition, custody funds of qualified foreign institutional investors (QFII) or RMB qualified foreign institutional investors (RQFII) in Financial Institutions and funds raised from domestic issuance of RMB bonds placed by overseas institutions in custody accounts of Financial Institutions shall be excluded as well.


- RMB trade financing is excluded while the exclusive rate of foreign currency trade financing has been raised from 20% to 100%.


- Financial Institutions' debts to offshore entities arising from inter-bank dealings shall not be included.


Other than the types of debts mentioned above, Circular 9 keeps the following types as mentioned in Circular 132 to be excluded from calculating the Financing Outstanding:


- passive debt in RMB incurred by Enterprises and Financial Institutions from offshore entities' investing to domestic bond market; RMB deposit of foreign entities in Financial Institutions;


- trade credit of Enterprises incurred from true cross-border trade (including both payables and receivables in advance) and RMB trade financing obtained from offshore financial institutions; various kinds of RMB trade financing generated due to conducting settlement for true cross-border trade by Financial Institutions;


- overseas debts of Enterprises incurred under cross-border cash pooling arrangements duly filed with the authorities;


- overseas debts incurred by Financial Enterprises due to overseas deposit taking of interbank, inter-branch account and affiliate transfer;


- RMB bonds issued in China by offshore parent companies of Enterprises to fund their onshore subsidiaries; and


- Any amount of cross-border debts of Enterprises or Financial Institutions converted into equity or is exempted.


Regarding the types of debts to be included in calculating the Financing Outstanding, Circular 9 provides that:


- onshore guarantee for offshore loans ("Nei Bao Wai Dai") provided by Financial Institutions to clients shall be included in calculating the Financing Outstanding at 20% which was 100% under Circular 132;

hl legalAlso, external contingent liabilities of Financial Institutions incurred from derivative products provided by Financial Institutions for real cross-border transactions and asset and liability currency and term risk hedge management services and contingent liabilities of Financial Institutions incurred from participation in international financial market transactions due to the need for currency and term risk hedge management, shall be included in calculating the Financing Outstanding at a fair value; and


- The remaining types of debts shall be included in calculating the Financing Outstanding according to actual conditions.


The PBOC may adjust the types of debts to be excluded from calculating the Financing Outstanding and the method for calculating the same with various types of debts according to the macro-financial regulation need and business development, and may permit, if necessary, certain types of debts to be excluded from calculating the Financing Outstanding.


4. Transitional Period


BT 201704 LEGAL 03According to Circular 9, the relevant regional pilot programs of cross-border financing innovation implemented by PBOC and State Administration of Foreign Exchange ("SAFE") shall be unified under cross-border financing management mode of Circular 9 since May 4th, 2017.


Circular 9 also sets a one-year transitional period for foreign-invested Enterprises and foreign-invested Financial Institutions starting from the date of promulgation of Circular 9 during which foreign-invested Enterprises and foreign-invested Financial Institutions may apply either the current cross-border financing management mode or the mode of Circular 9 at its sole discretion.


After the end of transitional period, foreign-invested Financial Institutions shall automatically apply the mode of Circular 9 while cross-border financing management mode for foreign-invested Enterprises will be determined by PBOC and SAFE after assessment based on the overall implementation of Circular 9.


With the current focus of foreign exchange administration on restricting outflow and expanding inflow, Circular 9 has further loosened the policies on in-bound financing of Enterprises and Financial Institutions. We will keep following up the future development and keep you updated in this regard.


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