Shanghai Free Trade Zone Allows Offshore RMB Borrowing

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SHANGHAI – To further enhance financing support for cross-border investment and trade, the Shanghai office of the People’s Bank of China (PBOC), the mainland’s central bank, has allowed companies based in the Shanghai free trade zone (FTZ) to conduct offshore RMB borrowing.

The Shanghai PBOC recently promulgated the “Notice concerning Support to Further Expand the Cross-Border Usage of RMB in the China (Shanghai) Pilot Free Trade Zone” (hereinafter referred to as the “Notice”), which simplifies the procedures for using RMB across the border under current account and direct investment items within the Shanghai FTZ. The Notice outlines the scale allowed for offshore RMB loans and the scope of using the borrowings. It also specifies some innovative services that will be offered in the Shanghai FTZ, such as cross-border E-commerce settlement and RMB exchange services.

Specifically, to simplify the procedures and expand the range of RMB cross-border uses, the Notice clarifies that:

  • Easier reviewing procedures will be implemented for cross-border RMB settlement under current account and direct investment items within the FTZ. Banks in Shanghai may directly make collections or payments based on the instructions submitted by individuals or entities within the FTZ under the principles of “knowing the customers, knowing the business, and conducting due diligence.”
  • Individuals employed or practicing within the FTZ are allowed to conduct cross-border RMB settlement for current account items. They can open personal settlement accounts or settlement accounts of sole proprietorships to deal with the collection and payment of these current account items.

In addition, the Notice provides four specific measures to improve the support for financing in the FTZ. Most notably, nonbanking financial institutions and enterprises located in the Shanghai FTZ are allowed to borrow RMB funds from offshore sources. However, the total amount of borrowing should not surpass the number calculated by multiplying the actual paid-in capital (for enterprises) or 1.5 times of the actual paid-in capital (for nonbanking financial institutions) by the macro-prudential policy parameter. The macro-prudential policy parameter is determined by the Shanghai PBOC based on the level of national credit control.

  • Enterprises: (actual paid-in capital) x (macro-prudential policy parameter)
  • Nonbanking Financial Institutions: (1.5)(actual paid-in capital) x (macro-prudential policy parameter)

RELATED: China Clarifies Issues Regarding RMB Cross-Border Direct Investment

The borrowed RMB funds may be transferred to China inbound, but must be kept in the special settlement account opened at the bank located in the FTZ and can only be used for the purpose of manufacturing operations and project construction within the FTZ, and project construction overseas. The term of loan should be more than one year.

According to China Daily, a source from Shanghai PBOC disclosed that the current interest rate of borrowing at Hong Kong is around 4 to 5 percent while the rate in mainland is above 6 percent.

Furthermore, the Notice stipulates that enterprises established in the FTZ may build a  two-way RMB cash pool within their corporate group. It also allows the central collection and payment of cross-border RMB for current account items to be conducted not only within member enterprises of a corporate group, but also to include enterprises outside of the group who are closely related based on supply chain and frequency of trading transactions.

RELATED: PBOC Simplifies Cross-Border RMB Transactions

With regard to the development of the E-commerce industry in the FTZ, it encourages banks in Shanghai to cooperate with payment institutions that have obtained an “online payment permit” in the FTZ or directly provide RMB settlement services to these E-commerce enterprises.

The Notice also encourages the China Foreign Exchange Trading Center and Shanghai Gold Exchange to provide cross-border RMB exchange services.

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