The People's Bank of China, the country’s central bank, issued a notice on expanding pilot programs on full-caliber cross-border financing macro-prudential management on January 22.

A total of 27 financial institutes and registered enterprises in the free trade zones of Shanghai, Tianjin, Guangdong and Fujian will be included.

The expansion marked the official popularization of the macro-prudential management that was launched in the Shanghai Free Trade Zone in February 2015. 

The Shanghai zone was the first to kick off the pilot program. It allowed financial institutes in Shanghai and its registered companies to independently carry out foreign currency financing abroad. The move was intended to increase leverage ratios for economic entities to raise fund overseas. 

The bank stated that the pilot program in Shanghai has produced positive results and accumulated experiences that can be copied and promoted, and that it’s time to expand the range of the pilot program. 

The notice pointed out that the central bank and the State Administration of Foreign Exchange won’t implement foreign debt preview, and eligible financial institutes and enterprises can independently carry out cross-border foreign currency financing within the capacity of their capital or net assets. 

The bank said that the expansion features foreign currency management integration, conversion period control and equal quantitative and structure regulations, as compared with previous cross-border financing policy. The rule is unified, open, transparent and market-oriented, which will help to broaden financing channels for financial institutes and enterprises. It improves autonomy in cross-border financing and utilization of funds overseas and makes things easier and cheaper for enterprises to raise funds. 

The notice stipulated that financial institutions and enterprises in the four free trade zones should raise funds abroad no bigger than the financing risk-weighted balance cap, which equals capital or net asset multiplying cross-border financing leverage ratio and macro-prudential control parameter. In particular, the macro-prudential control parameter stands at 

1. Financial institute’s net assets should be based on core capital. Leverage ratio for enterprises is one and 0.8 for financial institutes. 

Based on the those regulations, registered companies in the four free trade zones can raise funds abroad of no more than value than that of its net assets, while the 27 financial institutes can raise no more than 80 percent of their core capital value. Previously, enterprises could raise funds twice that of their contributed capital, and banks were divided into two groups. Banks in the Shanghai zone could raise funds five times that of tier one capital value, and bank branches in Shanghai could raise five percent of their headquarters’ tier one capital value. 

“Setting the cross-border financing cap based on net assets of enterprises in the new version is more suitable to market needs as compared with contributed capital,” said a bank official. 

The official also said that the new move practically means full opening-up of cross-border financing policy. Bank branches in the Shanghai Free Trade Zone will be subjected to their headquarters unified management of cross-border financing cap after the notice was issued. The previous cap regulations in the Shanghai zone are now invalid.

The central bank said that the all-caliber cross-border financing macro-prudential management will be optimized based on the development of the expanded programs and policy effects. It will also be popularized nationwide at the right time to effectively support microcosmic body in cross-border financing and avert macroeconomic risks. The bottom line is to avoid systematic and regional financial risks. 

The all-caliber cross-border financing macro-prudential management policy has a restriction mechanism based on microcosmic body’s capital or net assets and improved China’s macro-prudential policy framework. The central bank can carry out conversion period control of cross-border financing by financial institutes and enterprises by adjusting relevant parameters based on macro-control needs. In doing so, cross-border financing can be kept in line with macroeconomic development, overall debt paying ability and international balance of payments. Leverage ratio and currency mismatch risks can also be controlled, and systematic financial risks can be avoided.