Offshore Lending by Chinese Banks Included under Macro-prudential Regulation

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China’s top financial regulators have announced the inclusion of offshore lending operations by domestic banks within the remit of macro-prudential regulation.

The People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued the “Notice on Matters in Relation to the Offshore Lending Operations of Banking Sector Financial Institutions” (关于银行业金融机构境外贷款业务有关事宜的通知) on 29 January.

The Notice, which comes into effect on 1 March 2022, seeks to “support, unify and standardise the offshore lending operations of domestic banks; expedite the convenience of cross-border trade and investment, and also include the offshore lending business cross-border fund flows of banks within the macro-prudential regulatory policy system.”

The ceiling for the offshore loan balance of domestic Chinese banks has been defined as their “net tier-1 capital x offshore loan leverage ratio x the macro-prudential adjustment parameter.”

The Notice also confirms the scope of offshore renminbi lending operations, which must in principle be confined to payments made by offshore enterprises for their business operations.

PBOC and SAFE have included measures that prohibit the use of offshore renminbi loans for “securities investment, fake trade transactions, or other forms of speculative arbitrage transactions,” as well as the use of offshore loans to cycle funds back into China for the purpose of avoiding regulatory restrictions.

“At present offshore renminbi loan policies are quite old and limited to ‘expanding abroad’ projects,” said a Chinese government official.

“Foreign currency offshore loan policy is still only subject to regulation in principle, which makes it difficult to satisfy the development and regulatory requirements of current and future business growth.”