China Scraps Overseas Debt Quotas as Capital Outflows Worsen

Updated on
  • Quotas for corporate overseas bond sales and loan removed
  • Dollar bond sales from Chinese firms fell 17 percent in 2015

China removed quotas for companies to raise funds in the overseas bond and loan markets, as it tries to staunch capital outflows spurred by a currency devaluation.

The National Development and Reform Commission, China’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 on its website Wednesday. Companies are only required 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 China will do more to counter the flow of money out of the nation, 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 $93.9 billion last month as the People’s Bank of China intervened to support the yuan following an Aug. 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) Ltd. in Shanghai.

Policy Challenges

The NDRC also said it will encourage companies with good credit quality and strong debt repayment ability to raise money overseas for projects including the nation’s “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 toward onshore debt financing. The Chinese currency has dropped 2.6 percent against the 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 dollar-denominated bond sales from Chinese companies down 17 percent this year to $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, a senior vice president at 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.”

— With assistance by Laura Yin, and Judy Chen

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