News Rules Govern Foreign Debts of Foreign-invested Banks

Determining the Criteria of Foreign Debt

The criteria of what constitutes foreign debt have changed over time in China. As early as 1987, the Statistical Monitoring of Foreign Debts Tentative Provisions provided that funds borrowed from abroad by banks with foreign capital or Sino-foreign joint venture banks that were registered in China were not regarded as foreign debts. The criteria were adjusted in 2001. The aforesaid debt was re-categorized as foreign debts, which was meant to be in line with international practice. The Administration of Foreign Debts Tentative Procedures, promulgated in January 2003, provided that the money borrowed from non-PRC residents by a foreign-invested bank was foreign debt and should fall within the foreign debt quota given to the bank.

Foreign Debt Amounts

The Procedures divide a foreign-invested bank's foreign debt into two types: medium/long-term foreign debt (i.e., debt with a term of more than one year but excluding exactly one year) and short-term foreign debt (i.e., terms of one year or less). The SDRC and the State Administration of Foreign Exchange (SAFE) are responsible for determining the amount of foreign debt of a foreign-invested bank.

PRC domestic institutional borrowers of foreign currency loans advanced by a foreign-invested bank no longer need to register foreign debt, whereas the foreign-invested bank has to make sure that the amount of medium/long-term foreign debt it incurs in a particular year does not exceed the limit set by the SDRC for that year. Throughout the year, the balance of short-term foreign debt of the foreign-invested bank shall not exceed the amount verified and approved by SAFE. The Notice gives detailed provisions for the measures on determination of the balance of short-term foreign debt.

Changes in Recognition and Conversion of Foreign Debt

The Procedures provide that foreign currency loans advanced by a foreign-invested bank to PRC incorporated institutional borrowers shall be regulated in the same manner as foreign currency loans given by domestically funded banks to domestic non-financial institutions. Except for export bills discounting, foreign currency loans granted by a foreign-invested bank to PRC incorporated institutions cannot be converted into RMB. Originally, foreign currency loans granted by a foreign-invested bank to such institutions could be converted into RMB upon the approval of SAFE.

Changes in Security Administration

As stipulated in the Procedures, the security provided by a foreign-invested bank in favour of overseas entities shall be regulated as external security and needs registration, whereas the security provided by PRC incorporated institutions in favour of a foreign-invested bank as collateral of borrowings of domestic borrowers shall be regulated as domestic security. The Notice also emphasizes that foreign currency security provided by a foreign-invested bank in favour of domestic non-financial institutions for RMB borrowings is forbidden in order to prevent the foreign currency being converted into RMB by foreclosure of the security.

Benefits and Defects

Foreign-invested banks will be the immediate beneficiaries of the Procedures. Since the Procedures provide that foreign currency borrowings granted to domestic non-financial institutions by a foreign-invested bank are not foreign debts, the loan business of a foreign-invested bank is no longer encumbered by foreign debt approval (notwithstanding the fact that monthly registration of such loans by the foreign-invested bank is still required). This enhances the capability of a foreign-invested bank to compete with domestically funded banks by following international practice and the principles of the WTO that aim to put domestically funded banks and foreign-invested banks on an equal footing as regards foreign debt administration. In addition, the Procedures may relieve some of the inflationary pressure in China by controlling the scale of foreign debts of foreign-invested banks and restricting foreign currency conversion into RMB.

As always, however, the anticipated results might not be realized. Foreign-invested banks are not allowed the same business scope as domestic banks and the Procedures impose restrictions on foreign-invested banks' funding sources. Both of these facts will definitely impact the normal operations of foreign-invested banks.