New funding channel benefits companies overseas

THE Chinese State Administration of Foreign Exchange (SAFE) on June 15 announced a new policy to allow onshore entities of Chinese domestic companies to obtain foreign-currency loans within China for lending to their offshore entities.

The new policy, which takes effect on July 1, also relaxes restrictions on individuals who provide guarantees to their offshore investments.

The move by SAFE is credit positive for Chinese corporate issuers with overseas investments or offshore debt, particularly non-property, high-yield issuers, as it provides a new foreign-currency funding channel for these issuers, which often had limited offshore liquidity resources.

Texhong Textile Group Limited and Winsway Coking Coal Holding Limited, both of which have overseas investments and offshore debt, are among our rated issuers that would benefit from the policy.

The permission to use domestic, foreign-currency loans for cross-border, inter-company borrowing provides alternative liquidity to service these companies' offshore debt, and we expect it to help them better match the currencies in which they borrow with the funding currencies of their overseas investments.

SAFE's allowance of individual guarantees, usually by a firm's major shareholders, also facilitates the borrowing company's offshore financing.

It is usually difficult for Chinese high-yield issuers to obtain offshore bank loans because of issuers' limited overseas assets and lack of extensive, foreign banking relationships.

They often have to rely on offshore capital markets, which are volatile and subject to investors' risk appetite for Chinese companies.

Securing funds

Whenever offshore debt and equity market investors' enthusiasm for Chinese companies wanes, as has occurred in recent months, China's high-yield issuers, in particular, face challenges securing funds from offshore channels to fund their overseas investments or refinance their offshore debt.

Chinese corporations usually have better onshore banking relationships but must cope with various restrictions on transferring capital overseas. Previously, such companies had limited channels to invest abroad owing to China's strict controls over the country's capital account.

Common channels include dividend distributions on foreign direct investment, repayment of registered, inter-company loans from offshore entities, borrowing from offshore banks under domestic bank guarantees, and inter-company advances using foreign currency they already own, but limited to 30 percent of the sending firm's registered capital.

High costs

All these channels require cumbersome approval procedures, and some may even involve high costs, such as withholding taxes for repatriation of dividends.

SAFE promulgated the new policy as the Chinese government tries to encourage more domestic, private-sector companies to invest abroad. The policy is yet another sign of China's gradual relaxation of its capital-account controls for outbound investments.

We note that total foreign currency loans available for lending are still small, with total foreign currency deposits of US$378 billion, or 3 percent of total deposits in China, and loans of US$566 billon, or 6 percent of all loans in China as of May 2012. However, both figures have been increasing.

Among our rated Chinese companies, we believe non-property, high yield issuers would most benefit from this new policy. The policy opens up a new funding avenue for them, as long as they have good onshore banking relationships, available domestic credit facilities, or assets for collateral to secure new bank loans.

Chinese state-owned enterprises and other investment grade corporates usually have better offshore liquidity resources and therefore less need for such loans. Meanwhile, we expect Chinese property issuers to continue facing a tightening credit market.

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