SCIO briefing on maintaining financial market stability during COVID-19 epidemic
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E-mail SCIO, March 25, 2020
China Business News:
As we know, the People's Bank of China and the State Administration of Foreign Exchange recently adjusted a key parameter in its macro-prudential management to allow domestic firms to borrow more foreign loans. My question is how this move will help domestic firms tide over difficulties? Is there the possibility of generating foreign debt? Thanks.
Xuan Changneng:
Thank you! In 2016, the People's Bank of China and the State Administration of Foreign Exchange established a framework for macro-prudential management of outstanding cross-border financing, and canceled the approval procedure for borrowing foreign debt, which has greatly facilitated the cross-border financing of domestic firms. The recent policy set the macro-prudent adjustment parameter, a multiplier that decides the upper limit of outstanding cross-border financing an institution can have, at 1.25, up from the previous value of 1, thus further expanding the space for companies to borrow foreign debt, and lowering their cost for financing.
Preliminary speculation indicates that the adjustment will help generate a financing amount to the tune of dozens of billions of U.S. dollars for companies. At present, small and medium-sized enterprises mainly resort to channels such as offshore banks and overseas affiliated companies to borrow foreign loans with the financing cost varying with their financial and business status and development prospects. After the parameter adjustment, the cross-border financing risk-weighted balance ceiling for companies has been lifted to 2.5-folds of a company's net assets from the previous limit of just 2-folds, thus expanding the overseas financing space by 25 percent. In this way, it's predicted that a financing scale of tens of billions of U.S. dollars can be achieved. The move is expected to help domestic institutions, especially small and medium-sized enterprises and private firms, raise funds through multiple channels, and ease their financing strain so that they can better resume work and production. In particular, the prevailing low interest rates set by central banks in overseas economies provide even bigger space for our domestic companies to receive cross-border financing.
In addition, I don't think the policy adjustment will cause a substantial increase in the scale of foreign debt as the scale and structure of China's foreign debt is reasonable at present, and the risk of foreign debt is controllable on the whole; the overall scale of domestic companies' borrowing from foreign banks and overseas affiliated companies doesn't constitute a sizable portion of China's overall foreign debt. Raising the parameter, while facilitating domestic companies to get cross-border financing, will not bring about a substantial increase in the scale of foreign debt.
What's notable is that the policy adjustment is not applicable to the financing platform of local governments and real estate companies, which thus can't borrow foreign loans in light of the macro-prudential management policy for outstanding cross-border financing. Thank you!
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