Currency control reform points to surge in debt from China
(This story was originally published on March 1 in IFR Asia, a Thomson Reuters publication)
* Regulator unveils proposal to simplify guarantees of foreign debt
* Move follows loosening of intercompany loan controls
* Bankers see incentive for issuers to raise money abroad
By Nethelie Wong
SINGAPORE, March 3 (IFR) - China's foreign exchange regulator has detailed plans to make it easier for companies to guarantee overseas debt, in a move that could have big implications for the Asian credit markets.
State Administration of Foreign Exchange, or SAFE, released a consultation paper on cross-border guarantees on February 13, outlining proposals to allow onshore companies to register cross-border payment guarantees, instead of seeking approval in advance.
"SAFE seems to be changing its regulatory role: moving to an overseer rather than a gatekeeper as the system is changing to a registration system from a quota system," said Vivian Lam, a partner at lawfirm Paul Hastings in Hong Kong.
The switch to a simpler guarantee scheme suggests the authorities are encouraging Chinese companies to borrow overseas to fund overseas projects and mergers and acquisitions.
"It is an important step in opening up the capital accounts as SAFE plans to give companies more flexibility in financing matters. It is establishing a framework for onshore assets to support offshore borrowing, or vice versa," said Lam.
The move would help Chinese issuers raise funds in the offshore markets and support their overseas expansion plans, Moody's said in a report.
Chinese issuers already dominate the region's capital markets, despite the cumbersome approval process surrounding offshore guarantees.
Overseas creditors have accepted less-secure alternatives, such as keepwell agreements, equity interest purchase undertakings, and other credit support mechanisms, but structures closer to a full guarantee, such as a standby letter of credit or a well established offshore subsidiary have proved more popular.
That suggests the new rules will benefit big state-owned enterprises and big Chinese property developers, such as Wanda Group, China Vanke and Poly Real Estate, which have huge onshore portfolios, but little or no assets offshore.
"An explicit guarantee from an onshore company with stronger credit gives investors more assurance that they will recover their principal in case the offshore bond issuer defaults. That, in turn, enables the offshore subsidiary to obtain lower funding costs and capture acquisition opportunities in a more timely manner," says Kai Hu, a Moody's vice president and senior credit officer.
For onshore assets to support offshore borrowing, the only restriction will be on financial institutions, which are not allowed to grant guarantees totalling more than 50% of their new assets at the end of the previous year.
"The new proposals, basically, remove most of the administrative rules, and allow the market to decide what kind of support an institution is willing to give," said a banker.
'GOING OUT' POLICIES
However, under SAFE's proposed changes, the proceeds that Chinese corporations receive from the guaranteed bonds cannot be remitted to the onshore parent for equity or debt investments, unless they win SAFE approval. That means, the rules on bringing offshore bond proceeds back to China remain unchanged.
"The proposals show a clear direction that 'going out' is being encouraged, while 'bringing money into China' will be controlled," said a Chinese banker familiar with the foreign currency policies.
Only Chinese banks will be allowed to handle transactions using offshore assets to support onshore borrowing.
"The new rules will definitely change the structure of bond issuance in China, and increase the supply as more onshore assets can be used to back deals. However, it is too early to say if the increase in supply will squeeze other issuers out because that will depend on the availability of overseas opportunities and other factors," said the Chinese banker.
Bankers in Asia have said that the amount of dollar and euro-denominated debt printed by Chinese issuers could approach US$100bn this year, depending on market conditions.
The latest proposals follow the unveiling of a new policy on January 24 that will loosen restrictions on intercompany loans between Chinese corporations' onshore and offshore entities. In addition, that policy will simplify documentation requirements and remove certain limitations on the amount of dividends that a foreign invested company can repatriate to its foreign shareholders.
Both of these developments are aimed at easing capital control restrictions in China, and provide further evidence of the government's commitment to the economic reform agenda.
Responses to the proposals are due on or before March 10. (Reporting By Nethelie Wong; Editing by Steve Garton and Abby Schultz)