China eases US dollar debt rules, but dollar squeeze presents new challenge for firms facing cash crunch
- China has eased restrictions on US dollar debt to allow private firms and small businesses to borrow up to 250 per cent of net assets
- But ability of Chinese businesses to borrow in the US dollar market has been hindered by a global squeeze in dollar liquidity and concerns over creditworthiness
China’s efforts to free up US dollar borrowing for private firms and small and medium-sized enterprises (SMEs) hit by the coronavirus pandemic are being hampered by a squeeze in the dollar market and concerns about the credit quality of Chinese businesses.
The limit for cross-border financing has been raised from 2 to 2.5 times the value of net assets based on the risk-weighted ratios for these firms in China, Xuan Changneng, deputy administrator of the State Administration of Foreign Exchange (SAFE) said at the weekend, reiterating an initial announcement made earlier this month.
The higher borrowing limit could result in tens of billions of US dollars flowing into China, he said, while stressing the new policy would not apply to property developers or local government financing vehicles. Beijing has clamped down on both to contain risks to financial stability.
This will help mainland companies, especially small and medium-sized enterprises as well as private enterprises to make full use of both international and domestic markets to raise funds
But foreign investors are reluctant to buy dollar debt from Chinese private firms because of a massive shortage of US dollars globally and concerns about creditworthiness, said Owen Gallimore, head of credit strategy at ANZ Bank.