PBOC Circular No. 27: A New Uniform Framework for Offshore Lending by PRC Banks

Speed Read

The Circular on matters relating to Offshore Lending Business of Banking Financial Institutions (Yinfa [2022] No. 27) 关于银行业金融机构境外贷款业务有关事宜的通知 (银发 [2022] 27号) (PBOC Circular No. 27) jointly promulgated by The People’s Bank of China of the PRC (PBOC) and The State Administration of Foreign Exchange of the PRC (SAFE) establishes a uniform legal framework for regulating the offshore lending businesses of PRC Banks (as defined below), which streamlines the legal framework for PRC Banks’ participation in offshore loan markets across all currencies and (subject to further guidance from PBOC and SAFE) could potentially represent a new avenue for offshore banks’ management of their existing loan portfolios.

Legal Briefing

Introduction

On 29 January 2022, PBOC and SAFE jointly promulgated PBOC Circular No. 27, which will take effect on 1 March 2022. PBOC Circular No. 27 establishes a uniform legal framework for regulating PRC Banks’ offshore lending businesses for all currencies.

PBOC Circular No. 27

(i) General

PBOC Circular No. 27 stipulates that a PRC licensed bank (including any PRC branch of a foreign bank) with international settlement capability which is duly registered with PBOC and SAFE (each a PRC Bank) may directly or indirectly¹ (an Indirect Lending) make available a cross-border loan facility in any currency (an Offshore Loan) to an offshore non-financial enterprise which is incorporated outside the PRC² (an Offshore Borrower) for permitted purposes so long as the relevant PRC Bank’s Offshore Loan Balance at any time is within its Offshore Loan Limit at that time.

Offshore banks which engage in Indirect Lending are also required to comply with PBOC Circular No. 27.

(ii) Offshore Loan Limit

We set out below the formulae for computation of the Offshore Loan Limit and the Offshore Loan Balance of a PRC Bank:

* If the Offshore Loan Limit of a PRC Bank computed based on the above formula is less than RMB2,000,000,000, the Offshore Loan Limit of the relevant PRC Bank will be fixed at RMB2,000,000,000.

In general:

(a) foreign currency offshore loans have higher risk weighing
      than Renminbi offshore loans to take into account of the
      exchange rate risk;

(b) the following loan businesses of a PRC Bank will not form
      part of the Offshore Loan Balance of the relevant PRC Bank
      for the purpose of PBOC Circular No. 27:

(1) trade facilities provided by a PRC Bank in support of
     genuine international trade settlement are excluded for
     the purpose of computation of the Offshore Loan Balance
     of the relevant PRC Bank;

(2) (in respect of free trade zone branch of a PRC Bank)
      loans advanced to an offshore borrower under
      segregated free trade zone account of that offshore
      borrower to the extent such loans are not funded by
      Renminbi funding provided by the head office of that
      PRC Bank; and

(3) (in respect of offshore banking division of a PRC Bank)
      offshore loans advanced to an offshore borrower;

(c) all amounts owing by an offshore entity to a PRC Bank as a
      result of that PRC Bank’s performance of its payment
      obligations to any offshore entities will form part of the
      Offshore Loan Balance of the relevant PRC Bank; and

(d) PBOC and SAFE may, taking into account of the prevailing
      macro-economic conditions and balance of payments of the
      PRC, adjust one or more of the Offshore Leverage Ratio,
      Macro-prudential Adjustment Factor and Currency Risk
      Factor from time to time.

(iii) Permitted Purposes of Offshore Loans

PBOC Circular No. 27 provides that Offshore Loans should in principle be used to finance the costs incurred in connection with the business scope of the relevant Offshore Borrower, provided that none of the proceeds of any Offshore Loan may be applied towards (a) financing any securities investment, (b) refinancing any offshore lending secured by onshore security/ guarantee (i.e. neibaowaidai (内保外贷) transaction; each a NBWD Transaction) or (c) financing any transaction with dubious trade background or other forms of speculative or arbitrage transactions, nor may any of the proceeds of any Offshore Loan be repatriated into the PRC by means of, for example but without limitation, inbound lending or equity investment.

(iv) Reporting requirement

PBOC Circular No. 27 imposes ongoing reporting obligation on each PRC Bank to submit monthly reports on information relating to its Offshore Loan Balance in the immediately preceding month to PBOC and SAFE.

(v) Consequences for failure to comply with PBOC Circular No. 27

If a PRC Bank exceeds its Offshore Loan Limit as a result of a change to its tier 1 capital or working capital or adjustment to the Offshore Leverage Ratio and/or the Macro-prudential Adjustment Factor, that PRC Bank may continue to maintain the existing offshore loans up to their respective maturity dates. However, that PRC Bank may not make available further offshore loans to Offshore Borrowers until it complies with the then latest Offshore Loan Limit applicable to it.

Points to clarify

Whilst PBOC Circular No. 27 is a welcome reform to facilitate the development of PRC Banks’ offshore lending businesses, we anticipate that market participants will require further guidance from PBOC and SAFE on the following in order for PBOC Circular No. 27 to achieve its desired policy effect:

(i) Characterisation of PRC Banks’ participation in Offshore Lending in NBWD Transaction structure

Whilst PBOC Circular No. 27 imposes separate reporting requirements in respect of onshore security/ guarantee for securing/ guaranteeing Offshore Loans comprising of PRC Banks and offshore banks (e.g. an offshore syndicated/ club facility to an offshore borrower in NBWD Transaction structure) (each a NBWD Syndicated Transaction), it is unclear from PBOC Circular No. 27 whether PRC Banks’ participation in such new NBWD Syndicated Transactions would be characterised as offshore lending or cross-border lending for the purpose of SAFE Regulation No. 29⁷.

Assuming that only the portion of PRC Banks’ participation in such NBWD Syndicated Transaction would be characterised as cross-border lending, the portion of the PRC Banks’ participation in such NBWD Syndicated Transaction will not be subject to neibaowaidai registration with SAFE, whereas the remaining portion of offshore banks’ participation in such NBWD Syndicated Transaction will be subject to neibaowaidai registration with SAFE in accordance with SAFE Regulation No. 29.

Prior to the promulgation of PBOC Circular No. 27, we have seen different branches of SAFE adopting different practices with respect to neibaowaidai registration for onshore security/ guarantee under NBWD Syndicated Transactions. Whilst certain branches of SAFE specifically require the portion of PRC Banks’ participation in NBWD Syndicated Transactions to be excluded from neibaowaidai registration, we have also come across others branches of SAFE which do not impose such requirement. It remains to be seen, after the promulgation of PBOC Circular No. 27, how SAFE would approach this in practice to achieve the separate reporting requirement in respect of PRC Banks’ and offshore banks’ respective interests in onshore security/ guarantee under NBWD Syndicated Transaction.

(ii) Loan assignment and transfer to PRC Banks

Subject to further guidance from PBOC and SAFE, it may be possible for offshore banks to assign and/or transfer Offshore Loans to a PRC Bank on the basis that such PRC Bank’s participation in such Offshore Loan would form part of the Offshore Loan Balance of that PRC Bank. This could represent a new avenue for offshore banks’ management of their existing loan portfolios.

We welcome any queries on this legal briefing and the latest developments on PBOC, SAFE and NDRC regulations relating to cross-border financing. Please feel free to contact your usual Norton Rose Fulbright contacts if you wish to discuss further.

Published on 15 February 2022; Last updated on 18 February 2022.