The State Administration of Foreign Exchange (SAFE) recently promulgated the Circular of the State Administration of Foreign Exchange on the Administration of External Guarantees Provided by Domestic Institutions (hereinafter referred to as the "Circular"). An interview was conducted with a relevant official of the SAFE regarding issues related to the Circular.
Q: What is the background to this promulgation?
A: According to the relevant stipulations on the administration of external guarantees currently in effect, with the exception of financing external guarantees provided by domestic banks for overseas investment enterprises were subject to annual balance management, the other types of external guarantees were mainly subject to case-by-case approvals.
With Chinas increasing integration into the global economy, external investments of domestic institutions have been on a constant rise. Overseas investment enterprises are increasingly demanding credit support from domestic institutions, resulting in an urgent demand to improve and reform current policies for the administration of external guarantees. The policies currently in effect have some limitations: (i) the balance management is only applicable to certain types of institutions and is not applicable to non-bank financial institutions and enterprises; the balance management for external guarantees provided by banks is only applicable to financing guarantees in which the debtor is an overseas institutions; (ii) currently banks assign quotas for the balance of the external guarantees mainly based on the foreign exchange capital funds and the working capital of the debtor, which has led to decreasing rationality in the quota assignment; (iii) the policies currently in effect have higher qualifying standards for the guarantor and the debtor, that is, higher standards are imposed on the net asset proportions of both the guarantor and the debtor, the profits and losses of the debtor, and so on, which to some extent has hindered the development of the business of external guarantees. This situation necessitates early amendment to the policies concerning administration of external guarantees provided by domestic institutions.
Q: What are the major aims and principles behind the adjustments to the administration of external guarantees by domestic institutions?
A: Within the present fundamental policy framework for external guarantees, the reform aims to substantially streamline and straighten out the existing administration policies, and to clarify the technical and operational issues that need to be further clarified in the practice of the administration of guarantees, thereby further promoting the facilitation of trade and further pushing forward the reform of the mode of foreign exchange administration for external guarantees.
The policy adjustment mainly complies with the principle of streamlining formalities, ensuring high efficiency of business operations, and keeping risks controllable. By streamlining the formalities for administrative approval and increasing the efficiency of administration, the SAFE will be able to provide greater support to the going-globalactivities of domestic institutions. Meanwhile, the SAFE must prevent possible negative impacts from the conversion of contingent external debts into actual debts or claims. Overall, the reform simultaneously will serve to promote development and to keep risks controllable.
Q: What changes has the adjustment entailed in the mode of administration of external guarantees provided by domestic banks?
A: The changes can be summed up in seven respects: (i) the scope for implementing balance management for financing external guarantees was expanded. The adjustment allows financing guarantees to be provided to institutions both at home and abroad instead of only to overseas institutions. That is to say, the banks provision of financing external guarantees to domestic institutions is no longer subject to deal-by-deal application and approval; (ii) adjustments have been made to the criterion for assignment of the balance quotas to the banks. The assignment of quotas is no longer subject to foreign exchange capital funds or working capital. Rather, the foreign exchange authorities are allowed to assign quotas to banks based on the paid-in capital in both RMB and foreign currency, or the foreign exchange net assets of the bank. In other words, the quota for a single bank shall not exceed 50% of its paid-in capital or working capital in both RMB and foreign currency, nor exceed the net asset value of its foreign exchange; (iii) the conditions for the debtorsqualifications for bank provision of financing external guarantees have been lifted, that is, the debtor shall not be subject to such conditions as its equity relationship with domestic institutions, net asset proportions, and profits and losses; (iv) the mode for the administration of the banksprovision of non-financing external guarantees has been clarified. The debtor shall not be subject to net asset proportions, profits and losses, and ex-ante approval to obtain non-financing L/G from banks; meanwhile, to ensure adequate caution, it is required that at least one of either the debtor and beneficiary shall be a domestic institution, or shall be an overseas institution in which a domestic institution directly or indirectly holds shares; (v) it is clarified that the ex-ante approval formalities shall be lifted for the banksprovision of external guarantees; (vi) it has been clarified that the registration of the external guarantees under the banksquota management shall be subject to regular filing; (vii) the relevant statements for the regular filing of the banksprovision of external guarantees have been re-designed to facilitate the filing and submission of the data.
Q: What changes have been made in the mode of administration of external guarantees provided by domestic non-bank financial institutions and enterprises after the policy adjustment?
A: The changes can be summed up in five respects: (i) an administration mode based on deal-by-deal approval supplemented by administration of the balance has been formed. Domestic non-bank financial institutions and enterprises (including wholly foreign-funded enterprises) with large numbers of external guarantee deals and high standardization of internal management that provide financing and non-financing external guarantees can apply to the SAFE for assignment of balance quotas and can provide external guarantees within the assigned quotas, without having to apply to the SAFE for deal-by-deal approval. However, the balance quota assigned by the SAFE and/or the balance of deal-by-deal external guarantees approved by the SAFE shall not exceed 50% of the net assets of the enterprise; (ii) the proportion of net assets owned by the corporate guarantor is uniformly adjusted to 15%, to replace the previously implemented separate rates for trade enterprises and non-trade enterprises; (iii) the scope of the debtor has been expanded. If the guarantor is an enterprise, the debtor shall be an institution formed within or outside China in which the guarantor directly or indirectly holds shares, replacing the pre-adjustment provision that the debtor shall be a first-layer subsidiary of domestic enterprises that are formed within or outside China. If the guarantor is a non-bank financial institution, the debtor shall be an institution within China, or an institution formed by a domestic institution or an institution in which a domestic institution directly or indirectly holds shares according to the relevant provisions; (iv) it has been clarified that in the event that non-bank financial institutions and enterprises perform external guarantees, they must file an application with the foreign exchange administration authority in their locality for deal-by-deal approval, and the purchase of foreign exchange is allowed when they provide the external guarantees; (v) it has been clarified that wholly foreign-funded enterprises shall handle the case-by-case approval, registration, and other formalities for their external guarantees with reference to the principles for the administration of general enterprises.
Q: What adjustments have been made to the qualifications of the debtor?
A: The policy adjustment has lowered the standards for the debtorsqualifications. The major adjustments can be summed up in three respects: (i) the scope of the debtor has been expanded to various degrees based on the institutional type of the guarantor. For a financing external guarantee provided by a bank, the debtor is not subject to any qualifications, and the bank has discretion over the provision of external guarantees based on its business development needs and its ability to keep internal risks under control. For a non-financing external guarantee provided by a bank, only one of the debtor or the beneficiary shall be a domestic institution or an overseas institution in which a domestic institution directly or indirectly holds shares. In an external guarantee provided by non-bank financial institutions, the debtor has been adjusted to be domestic institutions, or overseas investment enterprises owned by domestic institutions. In an external guarantee provided by an enterprise, the scope of the debtor is expanded to encompass enterprises that were established within or outside China in which the guarantor directly or indirectly holds shares; (ii) the financial index restrictions on the debtor have been unified and simplified: the requirement on the net asset proportion of the debtor is uniformly adjusted to the net asset value of the debtor shall be positive, and the profit requirement has been adjusted to the debtor shall have made profits in at least one of the past three years, replacing the previous the debtor shall not have any losses (for long-term projects such as resources exploration projects, the aforementioned three years can be extended to five years); (iii) the requirement that If the debtor is a joint venture within or outside China, the guarantees shall only be provided according to the proportions of the capital contributions of both partieshas been lifted.
Q: What is the significance of the policy adjustment?
A: The reform of the mode of administration of external guarantees is a critical step in further refining foreign exchange administration to achieve the goal of administration with the provision of better services. It will provide greater momentum for domestic institutions to implement the national strategy of going global on a wider scale and at a higher level, with greater involvement in international competition and collaboration. It will help domestic institutions take advantage of markets and resources both at home and aboard, promote the facilitation of trade and investment, and increase the efficiency of resource utilization. By stimulating financial innovation and business expansion in the financial industry and keeping potential risks under control, the adjustment will also play a positive role in sharpening the international competitive edge of Chinas financial industry.
Q: How does the SAFE intend to control risks during the post-adjustment period?
A: During implementation of the policy adjustment, we have taken into full consideration the practices in the administration of external guarantees provided by domestic institutions and have carried out classified administration of external guarantees based on the different risk-bearing and management capabilities of the institutions. This has enhanced risk control from an institutional perspective. The ex-post examination mechanism was strengthened. Thus, we have kept relevant risks controllable. Specifically: first, administration practices during recent years show that the performance of external guarantees provided by domestic institutions has remained at a low level; and the credit risks of the various categories of entities under external guarantees have been kept under effective control; second, given the varied risk management capabilities of banks, non-bank financial institutions, and non-financial enterprises owing to their different stages of development, we have established a mode for implementing classified administration; and while lowering the standards for the qualifications of the relevant entities, we have enhanced risk control by improving system design; third, we have conducted pressure tests for the policy adjustment. The results of the computations show that overall the risks are controllable. We will constantly improve the approaches for statistical monitoring of the external guarantees and the mechanisms for ex-post examination and will strengthen statistical monitoring, analysis, and early warning for external guarantees, so as to keep potential risks under control.
