26 Jan 2017
PBOC Raises Cross-border Financing Leverage Ratio for Domestic Entities
The central bank recently issued the Circular of the People’s Bank of China on Matters Concerning the Macro-prudential Management of Overall Cross-border Financing (Yin Fa No.9 ) to take this policy which is already in practice in the whole country a step further. The most notable change is that the cross-border financing leverage ratio will be raised from 1 to 2 for enterprises incorporated in China.
The Circular of the People’s Bank of China on the Nationwide Implementation of Macro-prudential Management of Overall Cross-border Financing (Yin Fa No.132 ) which became effective on 3 May 2016 aims to facilitate Chinese-funded enterprises in borrowing foreign debt and ease their forex settlement restrictions.
Specifically, for enterprises, the upper limit of the risk-weighted balance of cross-border financing will be the product of their net assets, a cross-border financing leverage ratio and a macro-prudential adjustment parameter. For banks, it will be the product of their tier-one capital, a cross-border financing leverage ratio and a macro-prudential adjustment parameter. For non-banking financial institutions, it will be the product of capital (paid-in capital or capital stock + capital reserve), a cross-border financing leverage ratio and a macro-prudential adjustment parameter. The leverage ratio is set at 1 for enterprises and non-banking financial institutions, and 0.8 for banking financial institutions.
The new Circular of the central bank adjusts the cross-border financing leverage ratio for enterprises from 1 to 2. This means that an enterprise can borrow more foreign loans with net asset remaining unchanged. It also continues the spirit of Circular No. 132 and encourages enterprises to make use of renminbi financing and medium- and long-term financing by setting risk conversion factors.
Compared with Circular No. 132, the new Circular further clarifies that passive indebtedness in local and foreign currencies arising from investment by offshore institutions in the domestic bond market, custody funds deposited by QFII and RQFII in financial institutions, and Panda bond proceeds etc deposited in the custody accounts of financial institutions do not count towards the upper limit of cross-border financing balance. This means a higher cross-border financing cap for banks.
The new Circular clearly states that the management model stipulated therein will be universally implemented with effect from 4 May 2017. Foreign-invested enterprises and foreign financial institutions will continue to enjoy a one-year grace period and can choose between the existing model and the model stipulated in the new Circular.