Fitch: Higher-Rated Issuers Gain from Change in China's Offshore Debt Policy
Small companies that have been tapping offshore bank loans, however, may cut back on this channel as they will now be required to pre-register their offshore loan plans.
On 14 September 2015, China's National Development and Reform Commission (NDRC) announced the adoption of a pre-registration system that requires onshore companies to pre-register with the NDRC or selected local government NDRCs before issuing any kind of offshore debt with maturity of more than one year. This is required whether the debt is issued by the company or through its offshore subsidiaries or branches; or whether it is in Chinese yuan or a foreign currency. This will replace the current approval process for the issuance of offshore capital market debt. Companies are also required to file their completed debt issuance within 10 working days.
NDRC will determine if the application for the pre-registration of offshore debt issuance will be processed within five working days; one of the factors considered will be whether the debt issuance will exceed a national offshore debt quota. When the quota has been exceeded, NDRC will make a public announcement and stop all pre-registration for offshore debt issuance.
Fitch believes that this change will streamline the offshore debt issuance process and give Chinese companies more flexibility in choosing between onshore and offshore debt; but the immediate reaction will likely be muted.
Companies that are involved in economic activities or sectors that the government is promoting, such as the Land-Sea Silk Road, the Beijing-Tianjin-Hebei development are, the Yangtze River Economic Zone, and projects that are part of the China-initiated Global Capacity and Equipment Manufacturing Cooperation, may enjoy improved access to funds raised via offshore debt issuance for onshore use. Offshore debt will still allow highly rated companies to save on interest costs, which remain lower than that for onshore debt. However, in the near term, these companies will have to consider the currency risk in offshore debt issuance and rising business uncertainties in their decisions on what kind of debt, if any, to use.
Fitch believes small companies that have relationships with banks offshore may face more hurdles in their continued use of offshore loans. The criteria for companies pre-registering their offshore debts are: no record of default, good corporate governance, having risk controls in place to manage offshore debts, good credit standing, and a relatively strong ability to service debts. The criteria fits with the government's intention for this policy change to encourage the use of cheaper offshore funding by creditworthy companies to support China's economic development.