Enterprise Financing and Foreign Debt Management

Measures to improve foreign debt management have been aimed at making cross-border financing easier for domestic companies. But managers at companies borrowing offshore need to make financing decisions carefully based on actual corporate performance，market demand，development prospects and financing costs. They must refrain from blindly adding leverage by borrowing offshore.

Small and medium sized businesses have long complained of an inability to obtain affordable financing. The slowing economy and the coronavirus outbreak have compounded their problems. Businesses have been gradually opening their doors and restoring operations as the coronavirus comes under control in China. In the months ahead they will be looking for affordable financing resources available domestically and abroad. The People's Bank of China and the State Administration of Foreign Exchange，taking into account the state of the economy and the balance of payments situation，have made proactive adjustments to foreign debt management policy. One policy measure has been to use macro-prudential management of cross-border financing to let more domestic entities — with the exception of real estate companies and local government financing platforms — to benefit from offshore financing. Another has been a pilot program for foreign debt facilitation that makes use of a quota system for cross-border financing of high-tech enterprises，particularly small and medium-sized firms.

Prior to 2014，China had maintained a system of strict management of its foreign debt. Requirements for those companies that could borrow were strict，and many Chinese companies，particularly small and medium-sized ones，were basically excluded from taking advantage of offshore financing. Borrowing levels were also kept low through the use of an approval system. This had a heavy impact on the long-term development of many domestic companies. The Decision on Major Issues Concerning Comprehensively Deepening Reforms，a policy document adopted at the close of the Third Plenary Session of the 18th Central Committee meeting of the Chinese Communist Party，makes a clear call to "establish and improve the foreign debt and capital flow management system within the framework of macro-prudential management."

In 2016 the People's Bank of China and SAFE built on the foundation of prior pilot programs and established a policy framework for uniform macro-prudential management of cross-border financing. The requirement of gaining prior approval for foreign borrowings was canceled and domestic entities were allowed to take on foreign debt within an overall framework. Foreign debt management policies for Chinese and foreign entities were unified to provide equal treatment for all market entities. Adjustable criteria (such as macro-prudential parameters and financing leverage ratios) were set up to ensure that regulatory agencies could adjust their controls on offshore borrowing and thereby limit overall risk in a timely manner when circumstances changed.

SAFE has also made significant moves in simplifying，optimizing and adjusting foreign debt registration and exchange management procedures. The unified macro-prudential management of cross-border financing has helped domestic enterprises use domestic and foreign funds to invest in key industries supported by our country and benefiting the real economy.

Currently，the outlook for the economy and the international balance of payments situation is not optimistic. Enterprises — especially small and medium-sized enterprises — are facing increasing difficulties. In order to strengthen financial support for controlling the coronavirus outbreak and promote economic and social development，the People's Bank of China and SAFE have raised the macro-prudential adjustment parameters of cross-border financing，expanding financing by 25%. According to preliminary estimates，this could mean an increase of tens of billions of dollars for domestic companies.

Raising the macro-prudential limits on borrowing is a counter-cyclical adjustment needed during the currently distressed economic conditions. It balances the relationship between the competing interests of boosting funding for companies and guarding against the creation of new sources of financial risk. Its objectives are to be "reducing the cost of real economic financing，preventing cross-border financing risks and promoting the balance of international payments."

Debt Facilitation Quota

As mentioned above，implementation of the uniform macro-prudential management of cross-border financing is a major reform. The policy meets the needs of cross-border financing of domestic entities，but there have been a number of shortcomings in the implementation process. The macro-prudential management framework of cross-border financing is an "inclusive" policy，the core of which is that market entities can determine the scale of foreign funds that can be borrowed according to the scale of their net assets/capital.

This is beneficial to many enterprises，but some small and medium-sized companies say they are not able to take advantage of the convenience brought about by these support policies. The value of these small but innovative enterprises mainly stems from their independent intellectual property rights，advanced technology，as well as market prospects. The scale of their long-term net assets is generally small，and in some cases negative. Therefore，they are not able to borrow，or unable to borrow sufficient foreign debt under the macro-prudential management framework of cross-border financing.

Let's take Zhongguancun in Beijing as an example. Surveys show that many enterprises in this district have limited assets but high growth momentum. Only about one-third of them have received financial support from domestic banks or other local financial institutions.

Innovation is the soul of a nation; it also is our hope for the future. The top priority of the "new development" philosophy that President Xi Jinping has espoused is innovation. In order to encourage innovation and help small and medium-sized technology companies，SAFE launched a pilot program on foreign debt facilitation in 2018 at the Zhongguancun National Innovation Demonstration Zone. This allowed small and medium-sized hi-tech companies that met certain criteria to borrow offshore. These companies could determine their own borrowings within a ceiling of US$5 million. Since the start of the pilot program hi-tech enterprises have benefited from the program，obtaining a total of nearly US$5 billion worth of financing. That saved them an estimated 1.1 billion yuan in financing costs. The program has also encouraged banks to expand their international settlement operations and increase their income from intermediate business. This helped raise the management expertise of participating companies and gave them greater flexibility in obt