China’s “high quality” companies have been encouraged to borrow medium- and long-term debt abroad, amid a contraction in offshore US dollar fundraising for Chinese firms this year following a series of defaults by property developers.
But the companies must comply with several criteria, including compliance with national policies, while their business operations must align with national macroeconomic controls and industrial policies, the National Development and Reform Commission (NDRC) said on Tuesday.
Over the past year, the company’s revenue must rank within the top five in its industry, with debt-to-asset ratio and other financial metrics outperforming the industry average.
The new measures aim to expand “high-level opening up, improve the convenience of cross-border investment and financing, and effectively utilise foreign debt to support high-quality development”, the NDRC said.
China’s top economic planner launched a public consultation in March, pointing to its intention to relax some of the requirements as long as the firms were deemed to be qualified, which would reduce the amount of time needed to raise funds abroad.
It will help high-quality enterprises better utilise the two markets and resources at home and abroad
“It will greatly enhance the flexibility of high-quality enterprises’ foreign debt financing, save foreign debt financing costs, and improve foreign debt financing efficiency,” said Beijing-based DeHeng Law Offices in a commentary on its WeChat social media account on Tuesday.
“It will help high-quality enterprises better utilise the two markets and resources at home and abroad, and give full play to the role of foreign debt funds in serving high-quality development.”
Since requirements were eased in 2015, China’s offshore corporate bond issuance climbed to US$129 billion in 2021, from US$25 billion in 2015.
However, issuance has dropped significantly since 2022, following a record volume of defaults, said Chang Li, director at S&P Global Ratings, who pointed to the NDRC responding by tightening debt standards.
“In other words, lower quality issuers will continue to face tightening regulations when issuing offshore debts, while high quality issuers are still able to access offshore markets as they were before,” Li said.
Li added that the move announced by the NDRC on Tuesday does not apply to property developers and local government financing vehicles (LGFVs), which are still facing tightened regulations.
Debt by Chinese real estate companies, financial institutions and LGFVs made up more than half of the US dollar offshore bond market.
The pressure of bonds coming to mature is still large, and the scale of net financing remains shrinking
LGFVs are hybrid entities that are both public and corporate and were created to skirt restrictions on local government borrowing.
China, which keeps a tight grip on cross-border capital flow, maintains an annual quota on foreign debt by domestic companies.
As of the end of 2023, China’s total outstanding foreign debt stood at US$2.45 trillion, with medium- to long-term debt accounting for 44 per cent, according to the State Administration of Foreign Exchange.
“The pressure of bonds coming to mature is still large, and the scale of net financing remains shrinking,” Dagong Global Credit Rating said last week.
“The net financing amount is negative except for a slight positive in February and March,” adding that net financing had contracted by US$27.68 billion in the first half of the year.
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