China to Tighten Scrutiny of Firms’ Foreign Debt Next Month

China’s new regulation to increase scrutiny of companies’ foreign debt will become effective Feb. 10 in the market’s biggest overhaul since 2015.

(Bloomberg) — China’s new regulation to increase scrutiny of companies’ foreign debt will become effective Feb. 10 in the market’s biggest overhaul since 2015. 

The effort will encompass debt instruments with tenors of over one year that are sold by Chinese firms or their controlled offshore entities, according to a Tuesday announcement on the National Development and Reform Commission’s website. 

The proposal from the country’s top economic planning body was made public in August as Chinese companies’ offshore bond delinquencies soared to record highs amid a liquidity crisis in the property sector. Defaults on foreign notes totaled $46.5 billion last year, according to data compiled by Bloomberg, versus $13.9 billion in 2021. 

Firms to date have only been asked to register offshore-bond issuance plans with the NDRC. Under the new regulation, borrowers will be required to register, report and receive approval for selling such debt. Chinese companies will also have to regularly submit information including their use of fundraising proceeds to the commission and report major situations that may impact debt repayment. 

“The main purpose of the new rules is to limit local government financing vehicles’ excess borrowings offshore,” said Zhaopeng Xing, senior China strategist at ANZ Bank China Co. 

China to Require Approvals for Firms to Issue Offshore Debt

Another notable change is that defaulted Chinese corporations might be able to apply for foreign debt sales.

Companies that take on foreign borrowings should meet certain criteria including having a good credit profile and debt-repayment ability while also having no bonds or other debt instruments that are delinquent or in default, according to 2015 regulations and August’s preliminary proposal. Tuesday’s statement didn’t include those conditions, potentially opening the door for cash-strapped firms to tap an offshore market that’s been largely shut to them.

The move could help developers that have defaulted on offshore debt, but whether they will be able to sell new bonds overseas ultimately depends on market acceptance, Xing added. 

Current policies “can’t fully match” new trends as Chinese companies’ offshore financing has undergone changes in recent years, the NDRC said in Tuesday’s statement. It added the new rule will improve post-issuance regulation and strengthen risk prevention.

–With assistance from Lorretta Chen.

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