China scraps overseas debt quotas as capital outflows worsen
Companies encouraged to borrow from abroad as falling currency prompts money to leave the mainland, but rising costs may dissuade them
Beijing has removed quotas for companies to raise funds in the overseas bond and loan markets, as it tries to restrict capital outflow spurred by a currency devaluation.
The National Development and Reform Commission, the country's top planning agency, will remove quota approval processes for foreign currency or yuan notes and loans with a term of more than one year, according to a statement posted on its website yesterday. Companies would be required only to register with the regulator, the statement said. Previously, the NDRC reviewed each firm's application for foreign borrowing, according to Moody's Investors Service.
The move comes amid mounting speculation Beijing will do more to counter the flow of money out of the mainland, after yuan positions at the central bank and financial institutions fell by the most on record in August. The nation's foreign-exchange reserves tumbled an unprecedented US$93.9 billion last month as the People's Bank of China intervened to support the yuan following an August 11 devaluation.
"Given the strong yuan depreciation expectation, the government is probably encouraging more overseas borrowings, which will result in more capital inflows," said Li Liuyang, the chief financial market analyst at Bank of Tokyo-Mitsubishi UFJ (China) in Shanghai.
The NDRC also said it would encourage companies with good credit quality and strong debt repayment ability to raise money overseas for projects including the "One Belt, One Road" campaign to develop ties along the old Silk Road. Other projects covered will include the joint development of the Beijing, Tianjin and Hebei region, as well as the Yangtze River economic zone.
One hurdle for the government is that companies have responded to the sliding yuan, which pushes up costs to service overseas debt, by turning more towards onshore debt financing. The yuan has dropped 2.6 per cent against the US dollar this year.
Falling domestic borrowing costs have also encouraged this trend, after the central bank cut benchmark interest rates five times since November. That's dragged US dollar-denominated bond sales from Chinese companies down 17 per cent this year to US$117.2 billion this year, according to data compiled by Bloomberg.
"The move will help quicken the process for Chinese companies to borrow offshore," said Ivan Chung, from Moody's. "But it's uncertain if the rule change will really result in more offshore bond issuances. After all, companies may be concerned about the rising costs after yuan depreciation."
