China (Shanghai) Pilot Free Trade Zone: New regulation issued on overseas debt financing for FTZ entities 

Issue 19 - 5 March 2015

On 12 February 2015, the Shanghai Head Office of the People's Bank of China (PBOC) issued an implementation regulation (Regulation) regarding the overseas debt financing that entities in the China (Shanghai) Pilot Free Trade Zone (FTZ) may raise through free trade accounts.

Unlike the existing rules applicable outside the FTZ (under which foreign debt is capped based on the remaining balance of total investment, net of registered capital, for foreign investment entities), the Regulation introduces a method under which the maximum foreign debt (including both foreign exchange and RMB debt) permitted for an entity is calculated by multiplying the entity’s capital by a leverage ratio and a policy parameter. According to a press release, the Regulation aims to provide more flexibility to FTZ entities in financing debt from overseas; to encourage mid- or long-term funds (in particular, RMB funds) to be used (instead of short-term funds) for industrial investment in the FTZ; and to help local governments gain experience in administering a new foreign debt control regime providing a more open and liberal environment. The Regulation also specifies that the funds raised through foreign financing should be used in the borrowers' own operating activities and for FTZ or overseas projects.

The Regulation entered into effect on the date of its issuance; however, affected entities still may opt to apply the previous foreign debt control measures.

Scope of foreign debts subject to control

Not all liabilities owed to foreign parties are treated as foreign debt that is subject to control. The Regulation provides clarifications regarding certain specific items:

Certain items NOT subject to control

• Deposits received by financial institutions from foreign parties;
• Accounts payable or advances arising from cross-border trading transactions;
• Guarantees for nonfinancing transactions;
• Trade financing (e.g. letters of credit) in RMB;
• “Panda” bonds for a party’s own use; and
• Intragroup cross-border cash pooling/centralized treasury management arrangements where the fund is limited to cash flows generated from operating and industrial investment activities.

Certain items subject to control

• Trade financing in foreign exchange: 20% of such financing will be treated as foreign debt subject to control; and
• Off-balance-sheet financing (contingent liabilities) raised by financial enterprises: 20% or 50% of such financing will be treated as foreign debt subject to control.

Total foreign debt

Total foreign debt is calculated as the sum of the amounts of each foreign debt item that are subject to control.

Amount of each foreign debt item = Balance of each foreign debt item x period determinant x currency determinant x type determinant

Period determinant: 1 for foreign debt due after one year (i.e. mid- or long-term debt); and 1.5 for foreign debt due within one year (i.e. short-term debt)

Currency determinant: 1 for RMB debt and 1.5 for foreign currency debt

Type determinant: 1 for all types of foreign debt other than off-balance-sheet financing; and 0.2 or 0.5 for off-balance-sheet financing

Maximum permitted amount of foreign debt

Under the Regulation, the total foreign debt that is subject to control for an affected entity cannot exceed a maximum permitted amount, otherwise the fund shall be returned or the borrower will be fined if the fund cannot be returned. The maximum permitted amount of foreign debt is calculated on an annual basis, according to the following formula:

Maximum permitted amount of foreign debt = Capital x overseas financing leverage ratio x policy parameter

Capital: Generally, capital is considered an entity’s total share capital and capital surplus from the latest audit report or capital verification report issued by Chinese certified public accountants.

Overseas financing leverage ratio: The ratio is 2 for nonfinancial FTZ enterprises; 2 or 3 for nonbanking FTZ financial enterprises; 5 for newly incorporated FTZ banks; and 5% or 8% for certain financial enterprises incorporated outside FTZ but with FTZ units or branches.

Policy parameter: 1 (for all cases) in initial stage

Reporting of foreign debt

For foreign debt subject to control, the relevant FTZ entities (i.e. the borrowers) must report the debt-financing transaction by providing the required documents, through banks, to the Shanghai Head Office of the PBOC after the financing agreement has been concluded and no later than three business days before the foreign funds are received. The borrowers also must publicly disclose their annual financial statements in the required format through the FTZ enterprise annual information public disclosure platform.

Please follow the link for a copy of the Regulation (in Chinese only). You may also access the relevant information and regulations about the Pilot FTZ via Deloitte's dedicated portal page.