China’s new rules facilitate offshore debt servicing

By Fitch Ratings | February 20, 2014, Thursday |

Print Edition

China’s recent relaxing of controls on cross-border foreign exchange flows could help to facilitate Chinese companies’ offshore debt servicing. However, it does not improve offshore creditors’ ability to pursue onshore legal recourse in the event of default.

We view the new rules released by the State Administration of Foreign Exchange (SAFE) as a market positive which support onshore companies’ ability to service their offshore debt. This includes providing an additional channel for Hong Kong-listed companies to obtain funds from their onshore operating companies. Specifically, the new rules pave the way for repatriating funds offshore via cross-border loans to any equity affiliate of onshore companies, which we believe include their offshore parent companies and intra-group affiliates. Previously, the offshore borrowers of such cross-border loans were limited to the onshore lenders’ wholly owned subsidiaries or those in which they held an equity stake.

In addition, SAFE has simplified the regulatory and administrative procedures for cross-border loans. A maximum limit of 30 percent of the onshore lenders’ shareholders’ equity remains in place, yet any amount exceeding the limit will now be subject to approval only from the local bureaus of SAFE rather than its Beijing headquarters. Chinese companies are free to apply for the duration of their cross-border loan quotas based on their own needs after SAFE abolished the two-year limit. Finally, SAFE has relaxed controls on the annual cap of dividend payments to offshore shareholders as well as the review procedures for transaction banks.

However, in the event of default, offshore creditors remain structurally subordinated and face legal barriers in seeking legal recourse onshore. Offshore bonds — which are not SAFE registered and even if they are — are often ignored in domestic bankruptcy proceedings. Offshore bondholders, whose liens are limited via an ownership interest in offshore intermediary vehicles, are at a disadvantage taking legal action against the borrower’s onshore assets.

SAFE’s new rules, effective on February 10 2014, are among measures China has rolled out in recent years to facilitate cross-border payments.

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