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In order to better serve the construction of a new development pattern and further support and regulate the overseas loan business of domestic banks, the People's Bank of China, together with the State Administration of Foreign Exchange, recently jointly issued the Notice on Matters Related to the Overseas Loan Business of Banking Financial Institutions (hereinafter referred to as the Notice), which will be implemented from 1 March 2022.
The People's Bank of China and the State Administration of Foreign Exchange shall exercise unified management over the overseas loan business of 27 banks, including the China Development Bank and the Export-Import Bank, and the branches and branches of the Chinese Bank of China at or above the sub-provincial city center branch and the branches and bureaus of the State Administration of Foreign Exchange shall manage the overseas loan business of banks other than 27 banks in accordance with the principle of territorial management.
The Circular incorporates cross-border capital flows related to banks' overseas loans into the macro-prudential management policy framework. Combined with the net tier 1 capital of each bank and the development of overseas loan business, the Notice sets the upper limit of the loan balance to "Tier 1 net capital * leverage ratio of overseas loans * macro-prudential adjustment parameters", and the People's Bank of China and the State Administration of Foreign Exchange can adjust the relevant parameters in a timely manner according to the macroeconomic situation to achieve counter-cyclical management of cross-border capital flows. At present, the upper limit of overseas loan balances fully takes into account the scale of each bank's stock business and reserves sufficient space for banks to carry out business.
The Circular points out that in principle, overseas loans issued by domestic banks should be used for relevant expenses within the scope of operation of overseas enterprises, and shall not be used for securities investment and repayment of overseas debts under domestically guaranteed foreign loans, shall not be used for fictitious trade background transactions or other forms of speculative arbitrage transactions, and shall not be transferred back to China for use by means of financing funds or equity investments in China.
Expand the scope of bank's overseas RMB loan business
The overseas loan business referred to in the Circular refers to the act of a domestic bank with the ability to conduct international settlement business by directly issuing local and foreign currency loans to overseas enterprises within the approved business scope, or indirectly issuing local and foreign currency loans to overseas enterprises for a period of more than one year (excluding one year, the same below) by means of financing funds from overseas banks.
"Overseas enterprises" refers to non-financial enterprises legally incorporated outside the territory of the People's Republic of China (including Hong Kong, Macao and Taiwan).
According to the relevant person in charge of the central bank, the current RMB overseas loan policy was introduced earlier and is limited to "going out" projects, and the foreign currency overseas loan policy is only provided in principle, which is difficult to meet the current and future business development and regulatory needs. In order to better play the role of cross-border financial business in supporting the development of the real economy and promote the construction of a new development pattern, in accordance with the idea of integrated management of local and foreign currencies, the People's Bank of China, together with the State Administration of Foreign Exchange, drafted the Notice, which aims to support and unify the regulation of domestic banks to carry out overseas loan business, promote cross-border trade and investment facilitation, and at the same time incorporate cross-border capital flows of banks' overseas loan business into the macro-prudential management policy framework with risk prevention as the orientation.
The Circular expands the scope of banks' overseas RMB loan business, expands the scope of banks' overseas RMB loan business from the original "going out" project to all overseas non-financial enterprises, and at the same time facilitates banks to carry out overseas loan business in RMB.
Setting the Macroprudential Regulation Parameters
The Circular incorporates cross-border capital flows related to banks' overseas loans into the macro-prudential management policy framework. Combined with the net tier 1 capital of each bank and the development of overseas loan business, the upper limit of the loan balance is set to "tier 1 net capital * leverage ratio of overseas loans * macro-prudential adjustment parameters", and the People's Bank of China and the State Administration of Foreign Exchange can adjust the relevant parameters in a timely manner according to the macroeconomic situation to achieve counter-cyclical management of cross-border capital flows. At present, the upper limit of overseas loan balances fully takes into account the scale of each bank's stock business and reserves sufficient space for banks to carry out business.
The Circular stipulates that domestic banks should, in accordance with the principle of prudent operation, comprehensively consider various factors such as assets and liabilities and currency structure, coordinate the development of domestic and overseas business, independently carry out overseas loan business within the upper limit of overseas loan balance in accordance with regulations, and encourage overseas enterprises with actual needs to give priority to the use of RMB loans.
The balance of overseas loans of domestic banks (referring to the outstanding balances that have been withdrawn, the same below) shall not exceed the upper limit, that is, the balance of overseas loans ≤ the upper limit of overseas loan balances.
The upper limit of overseas loan balance = net tier 1 capital of domestic banks (based on working capital of domestic branches of foreign banks) × the leverage ratio of overseas loans × macro-prudential adjustment parameters.
Overseas loan balance = local and foreign currency overseas loan balance + foreign currency overseas loan balance × exchange rate risk conversion factor.
The balance and upper limit of overseas loans are calculated in RMB, and the balance of foreign currency overseas loans is converted at the exchange rate level on the date of withdrawal. Trade financing handled by domestic banks based on real cross-border trade settlements is not included in the overseas loan balance management. Tier 1 net capital or working capital is subject to the most recent audited financial report (in the light of a banking corporation). Chinese Minmin Bank and the State Administration of Foreign Exchange dynamically adjust the leverage ratio of overseas loans, macro-prudential adjustment parameters, and exchange rate risk conversion factors according to the macroeconomic situation and cross-border capital flows.
Domestic banks should do a good job in the planning and management of overseas loan business to ensure that the loan balance does not exceed the upper limit at any point in time. If the balance of overseas loans exceeds the upper limit due to the adjustment of the bank's Tier 1 net capital (working capital), the leverage ratio of overseas loans or the adjustment of macro-prudential adjustment parameters, the bank should suspend the processing of new overseas loan business until the balance of overseas loans is adjusted to within the upper limit.
Prevent domestic funds from detouring back to China in the name of overseas loans
In principle, overseas loans issued by domestic banks shall be used for relevant expenditures within the scope of operation of overseas enterprises, and shall not be used for securities investment and repayment of overseas debts under domestically guaranteed foreign loans, shall not be used for fictitious trade background transactions or other forms of speculative arbitrage transactions, and shall not be transferred back to China for use by means of financing funds or equity investment in China.
Overseas loans used for overseas investment shall comply with the provisions of the relevant domestic competent authorities on overseas investment. Domestic banks should strengthen the verification of the true compliance of the debtor's qualifications, the use of funds, the expected source of repayment funds and the background of relevant transactions in the overseas loan business, conduct due diligence on whether it complies with relevant domestic and foreign laws and regulations, strictly review the credit status of overseas enterprises, and supervise the use of loan funds by overseas enterprises in accordance with the purposes stated by them. Where a domestic bank indirectly issues a loan in local and foreign currency to an overseas enterprise for a period of more than one year by means such as lending funds to an overseas bank, in principle, it shall require the direct creditors such as the overseas bank to refer to the provisions of this Article.
The central bank said that the regulation mainly considers that overseas loans should be used to support the real and reasonable business needs of overseas enterprises, prevent domestic funds from detouring back to China in the name of overseas loans, and circumvent other regulatory requirements.
Where the overseas loan business involves cross-border guarantees, the relevant information on cross-border guarantees shall be submitted separately by domestic and overseas creditors (beneficiaries) in accordance with relevant provisions, and the foreign claims arising from the performance of the guarantee by domestic banks shall be included in the management of their overseas loan balances.
Unified management of overseas loan business of 27 banks
The Circular establishes a policy framework for banks' overseas loans that integrates local and foreign currencies, unifies the regulations on the handling of banks' overseas RMB and foreign exchange loan business, and further facilitates banks to carry out overseas loan business in an orderly manner.
In principle, the repayment currency of overseas loans of domestic banks should be consistent with the loan currency. If the overseas enterprise does not have RMB income to repay the offshore RMB loan of the domestic bank, the domestic correspondent bank or the overseas RMB clearing bank and the participating bank may handle the RMB purchase and sale business for the cross-border RMB settlement needs arising from the repayment of the offshore RMB loan of the overseas bank by the overseas enterprise. Domestic banks can provide foreign exchange risk hedging and foreign exchange settlement services for overseas enterprises to repay the cross-border RMB settlement needs arising from the bank's overseas RMB loans.
When handling overseas loan business, domestic banks shall abide by the provisions of national laws and regulations and relevant competent departments, follow the principles of compliance with law, prudent operation and risk control, and earnestly do a good job in risk management of overseas loan business; they shall earnestly perform anti-money laundering, anti-terrorist financing and anti-tax evasion obligations in accordance with the Anti-Money Laundering Law of the People's Republic of China and other relevant provisions.
Overseas loans of development policy banks and overseas loans of banks in the pilot free trade zone shall be managed in accordance with the mode of this Notice, and the balance of overseas loans issued by domestic banks shall be included in the balance management of overseas loans provided for in this Notice. The business of domestic banks granting loans to overseas sovereign institutions shall be carried out with reference to the provisions of this Circular and shall be included in the management of overseas loan balances. Loans issued by domestic banks to overseas enterprises through the accounting unit of the free trade account shall be handled in accordance with the relevant provisions of the free trade account (loans issued by overseas enterprises using RMB funds allocated by the head office of the domestic bank shall be included in the balance management of overseas loans). Overseas loans issued by domestic banks through offshore accounts shall be handled in accordance with the relevant provisions of offshore banking business and shall not be included in the management of overseas loan balances.
Chinese Bank of China and the State Administration of Foreign Exchange shall exercise unified management over the overseas loan business of 27 banks, and the branches of the Chinese Bank of China at or above the sub-provincial city center branch and the branches of the State Administration of Foreign Exchange shall manage the overseas loan business of banks other than 27 banks in accordance with the principle of territorial management.
List of 27 banks:
1. China Development Bank
2. Export-Import Bank
3. Agricultural Development Bank
9. Postal Savings Bank of China
16. Guangfa Bank
19. Hengfeng Bank
21. Bohai Bank
25. HSBC Bank (China) Limited
26. Citibank (China) Limited
27. Standard Chartered Bank (China) Limited
In the next step, the People's Bank of China and the State Administration of Foreign Exchange will guide domestic banks to carry out overseas loan business in a sound and orderly manner in accordance with the provisions of the Notice, improve the level of risk prevention in cross-border business, and better serve the construction of a new development pattern. There is a transition period of 3 months from the date of the formal implementation of the Notice, and domestic banks should complete the filing work during the transition period and carry out overseas loan business in accordance with the requirements of the Notice.
Editor-in-charge: Tactical Constant