Financial Services Association, July 24 (Editor Yang Bin) Recently, the National Development and Reform Commission issued the “Notice on Supporting High-Quality Enterprises to Borrow Medium- and Long-Term Foreign Debt to Promote High-Quality Development of the Real Economy” (Foreign Investment Regulations (2024) No. 1037). (“Notice” for short). The “Notice” simplifies the review requirements and procedures for high-quality enterprises to issue foreign debt, and strictly defines the standards for high-quality enterprises. Industry insiders said that the Development and Reform Commission optimizes external debt management and services to support high-quality enterprises to make more efficient and convenient use of external debt funds in an integrated manner to serve the high-quality development of the real economy.

The rating agency China Securities Pengyuan told the Financial Federation that according to its statistics, China's foreign debt stock is currently 1.27 trillion US dollars, accounting for 87.8% in the medium to long term. The “Notice” helps high-quality domestic enterprises to improve the efficiency of reviewing foreign debt issued by high-quality domestic enterprises, and the issuance scale may increase. Since high-rated entities have relatively good domestic financing channels, under the current uncertain situation, the impact may be relatively limited in the short term. In the long run, it will help high-level players expand overseas financing.

Support high-quality enterprises to issue foreign bonds, and add a requirement to “rank in the top five in the industry in terms of revenue in the past year”

The NDRC's “Notice” states that high-quality enterprises with prominent positions in the industry, excellent credit, and a driving and leading role in promoting high-quality development of the real economy are actively supported to borrow foreign debt. According to the “Notice”, to be defined as a high-quality enterprise, it must meet five conditions:

(1) Comply with the requirements of the “Administrative Measures on the Examination and Registration of Medium- and Long-Term External Debt of Enterprises” (National Development and Reform Commission Order No. 56 of 2023) and other relevant regulations;

(2) Production and operation are in line with national macro-control and industrial policies;

(3) The revenue scale ranked in the top five in the industry in the past year, and indicators such as the balance ratio were superior to the industry average;

(4) The enterprise's international credit rating is investment grade (BBB- and above) or domestic credit rating is AAA;

(5) In the last three years, (1) no domestic or foreign debt has been defaulted and there are no ongoing delays in payment of principal and interest; (2) there have been no major violations of law and regulations, and not included in the list of serious untrustworthy entities; (3) financial statements have not been negative or cannot be expressed by certified public accountants. If the certified public accountant issues a reservation, the significant impact of the matters covered by the reservation has been eliminated.

At the beginning of 2023, the Development and Reform Commission issued the “Administrative Measures on the Examination and Registration of Medium- and Long-Term Foreign Debt of Enterprises” (NDRC Order No. 56 of 2023, “Order No. 56” for short), which clearly and meticulously stipulates the procedures for reviewing and registering foreign debt, including requirements for the timing, subject, method, materials, etc. of the application for review and registration, and improving the external debt review and registration network system.

In March of this year, the Development and Reform Commission solicited public comments on the “Notice of the National Development and Reform Commission on Supporting High-Quality Enterprises to Borrow Medium- and Long-Term Foreign Debt to Promote High-Quality Development of the Real Economy (Consultation Draft)” (“Draft for Comments”).

Zhang Qi, a senior researcher at the China Securities Research and Development Department, told the Financial Federation that the content of the official “Notice” is basically the same as the “Draft for Solicitation of Comments”. In terms of defining “high-quality enterprises,” the requirements are in line with national macro-control and industrial policies, that the main operating financial indicators are at an excellent level in the industry, and that the credit rating is high; at the same time, the NDRC will adjust the criteria for defining high-quality enterprises in due course. However, compared with the “Draft for Solicitation of Comments”, the “Notice” added the requirement to “rank in the top five in the industry in terms of revenue in the past year”.

Zhou Yiqin, founder of Guan Tiao Consulting and a senior financial supervision policy expert, said that on the basis of Order No. 56, the “Notice” refined the criteria for defining “high-quality enterprises.” The “Notice” positions high quality enterprises and requires them to “rank in the top five in the industry in terms of revenue in the past year”, etc., so leading enterprises in the industry can benefit more from this policy. After broadening cross-border investment and financing channels for high-quality enterprises, a good foundation has been laid for speeding up the implementation and promotion of medium- to long-term foreign debt utilization policies.

Notably, the notice states that “real estate enterprises and local state-owned enterprises that undertake financing functions of local governments apply for foreign debt review and registration, and are still managed in accordance with the original regulations.”

Zhang Qi pointed out that this “Notice” does not apply to overseas financing of real estate and CITI. Real estate bonds are mainly issued for private property, and the main purpose of financing is to borrow new and return old ones. Since March, overseas debt issuance by urban investment platforms has been tightened, and in principle, district and county platforms can only borrow new and return old ones. Provincial and prefecture-level platforms that are not on the relevant department's urban investment list have a certain possibility of additional financing, but judging from actual issuance, most overseas bond issuing platforms are in regions where debt repayment pressure is high, and the main purpose of financing is to borrow new or old.

Simplified external debt review requirements and processes, and can be “handled without payment” under specific conditions

For high-quality enterprises applying for foreign debt review and registration, the Development and Reform Commission will carry out special reviews on the basis of current management, simplify relevant requirements appropriately, and speed up the processing process. Specific measures include:

(1) An enterprise may submit an application for an annual planned consolidated foreign debt amount including subsidiaries;

(2) If applying for an international commercial loan, it is not possible to provide a signed loan agreement but can provide the loan institution's intended documents, it may be “processed without permission”; enterprises should supplement the relevant loan agreement when submitting information to the Development and Reform Commission after first withdrawing the loan;

(3) If applying for the issuance of overseas bonds, the lead underwriter has not yet been determined, “vacancy processing” may be granted; the enterprise shall additionally provide the lead underwriter's due diligence report and a letter of authenticity commitment when submitting information to our committee after the issuance of each overseas bond has been completed;

(4) For enterprises with a domestic credit rating of AAA and an international credit rating of A or above, the legal opinions of professional institutions in the application materials may be issued by the internal legal or compliance department of the enterprise.

Researchers Chen Dapeng and Wang Zerong of the Institute of Foreign Economics of the China Academy of Macroeconomic Research believe that the above regulations can not only meet the necessary audit quality requirements, but also reduce the institutional costs of high-quality enterprises applying for medium- to long-term foreign debt amounts, thereby increasing the enthusiasm of high-quality enterprises to make better use of foreign debt resources and optimize domestic and foreign capital allocation structures.

In addition, the “Notice” also encourages all localities to take the initiative to actively support and guide high-quality enterprises in the region to rationally carry out medium- and long-term external debt financing, improve the efficiency of the use of capital, and help the high-quality development of the real economy. At the same time, the “Notice” calls for improving supervision of the borrowing of foreign debt by high-quality enterprises during and after the fact, to coordinate development and security, and effectively prevent the risk of foreign debt.

The efficiency of issuing foreign debt by high-quality enterprises has improved, and financing costs are still the main consideration

A high level of opening-up to the outside world is one of the important elements in building a high-level socialist market economy system. In October 2023, the Central Financial Work Conference made a work plan on “improving the facilitation of cross-border investment and financing”.

Zhang Qi pointed out that in this context, the Development and Reform Commission's optimization of foreign debt management and services will help promote China's effective use of foreign capital and expand two-way openness. It can also actively play the dual control functions of medium- and long-term external debt review and registration, and support high-quality enterprises to use foreign debt funds more efficiently and conveniently to serve the high-quality development of the real economy.

Zhou Yiqin believes that for overseas Chinese companies, the international economic situation is unpredictable, and the internal macroeconomic environment is also complex and varied. The NDRC policy aims to enhance the global competitiveness of high-quality enterprises and help them make proper use of both domestic and foreign financial resources.

Chen Dapeng and Wang Zerong said that with the implementation of the “Notice”, the efficiency of reviewing and registering medium- to long-term foreign debt applications for high-quality enterprises will be greatly improved, which is conducive to further promoting the facilitation of cross-border investment and financing, broadening channels for foreign investment in China, and helping enterprises optimize the allocation of domestic and foreign factor resources.

According to Wind data, as of July 24, 2024, the foreign debt stock was 1.27 trillion US dollars, of which the Chinese financial debt stock was 331.678 billion US dollars, accounting for 26.0%; the Chinese real estate debt stock was 163.737 billion US dollars, accounting for 12.8%; and the Chinese capital investment bond stock was 104.897 billion US dollars, accounting for 8.2%. The size of medium- to long-term external debt is about 1119.3 billion yuan, accounting for 87.8%.

Zhang Qi believes that the “Notice” will help improve the efficiency of reviewing the issuance of foreign debt by high-quality domestic enterprises, but the effect of promoting the issuance of foreign debt by high-quality domestic enterprises is limited at this stage. For high-quality enterprises as defined by the Development and Reform Commission, the cost of issuing RMB bonds domestically is lower than the cost of overseas financing at this stage. Apart from some enterprises requiring financing in US dollars or overseas RMB due to their business, domestic RMB financing is still the preferred financing method.

Further interpretation points out that the huge difference in financing costs between domestic and foreign bonds is mainly reflected in offshore dollar bonds, which mainly depend on US dollar interest rates. The performance of overseas RMB bonds is relatively divided. For high-quality enterprises, the cost of overseas RMB bonds is higher than domestic, but the difference is not as obvious as that of US dollar bonds and RMB bonds. Furthermore, overseas RMB bond financiers with high interest rates are mainly CITI, and most of them are restricted from domestic financing. In March of this year, overseas debt issuance by urban investment platforms was tightened. Issuers cannot be on the 3,899 list. In principle, district and county platforms can only borrow new and old. According to relevant rules, provincial and prefecture-level platforms that are not on the list have some possibility of additional financing, but judging from actual issuance, most overseas bond issuing platforms are regions with high debt repayment pressure, and the purpose of financing is mainly to borrow new or old.