The People's Bank of China recently rolled out its policy known as Document No. 18 -- or more formally called the Pilot Project for Expanding Full-coverage Macroprudential Regulation over Cross-border Financing (Yinfa No. 18 [2016]) This pilot program establishes a regulatory framework that allows market players to determine their  financing according to their capital or net assets. It covers 27 banks with operations across the country as well as a number of enterprises registered in free trade zones in the cities of Shanghai,Tianjin and Guangzhou and Fujian province.

Key Points of the New Policy

The new policy states that market players can borrow from foreign sources according to their capital or net assets. This regulates cross-border movements of foreign borrowings by controlling financial leverage ratios and imposing macroprudential limits. Document No. 18 has reduced the financial leverage ratio by half to prevent risks from large-scale offshore borrowings. Under the previous pilot policy,Chinese-invested enterprises -- which originally had no access to foreign exchange -- were allowed by the State Administration of Foreign Exchange to make foreign borrowings of up to twice the amount of their net assets. This was on a limited basis that applied only to designated pilot areas. The ceiling on offshore borrowings has now been lowered to 100% of their net assets. Additionally,borrowing terms and the currency of the borrowings are taken into consideration. Document No. 18 allows Chinese and foreign-invested enterprises and foreign-invested financial institutions to choose between the new macroprudential regulatory system and the original system under which market players can make cross-border financings equal to the difference between their investment and registered capital. It also states that the National Development and Reform Commission,which has a key role in economic planning,and other government departments can continue their role in setting medium and long-term macro debt targets. This will limit the impact of the new policy on financing volumes and demonstrates some flexibility in the new regulations.

Under the original Detailed Macroprudential Regulations on Separate Accounting of Overseas Financing and Cross-border Capital Flows in China (Shanghai) Pilot Free Trade Zone (Shanghai Headquarters Yinfa No. 8 [2015]) all branches of financial institutions were permitted to borrow from offshore at a designated ratio to their capital level. But Document 18 attempts to prevent duplicate borrowings from the branch level offices. It requires foreign borrowings of all branches to be counted in the total amount of borrowings of their head office.