PBOC Notice 27 on Offshore Lending by PRC Banks

The Notice on Offshore Lending Business of Banking Financial Institutions (Yinfa [2022] No 27) (“PBOC Notice 27”) was issued jointly by The People’s Bank of China (“PBOC”) and The State Administration of Foreign Exchange (“SAFE”), and became effective on 1 March 2022. It sets out a regulatory framework for cross-border lending (in RMB and foreign currencies) of PRC^[1] domestic banks (“domestic banks”) to offshore enterprises. To facilitate the understanding of the content and impact of PBOC Notice 27, we set out the following Q&As:

1. Is PBOC Notice 27 permitting offshore lending for the first time?

No. PRC policy banks and certain commercial banks have been doing offshore lending pursuant to earlier regulations or pilot rules in certain cities, but many of those rules concerned RMB loans only, and there were few unified rules applicable to all domestic banks. Some of those rules and regulations were repealed when PBOC Notice 27 became effective on 1 March 2022^[2], while certain offshore lending rules relating to offshore accounts and free-trade accounts continue to be effective (see further Question 2 below).

2. Which banks are regulated by PBOC Notice 27?

The scope for domestic banks to engage in offshore lending has been significantly enlarged under PBOC Notice 27. PRC licensed banks with international settlement capability are eligible to engage in offshore lending within their approved business scope. These include banks incorporated in the PRC (domestically-funded or foreign-funded) and domestic branches of foreign banks. Offshore lending in the following circumstances are however excluded from the scope of PBOC Notice 27:

lending through offshore accounts (“OSA”) of domestic banks
lending by offshore branches of domestic banks.

Ambiguity lies in the situation for lending through segregated accounting units of free-trade non-resident accounts (“FTN”) of domestic banks. According to PBOC Notice 27, where offshore lending is conducted through an FTN, the FTN regulatory framework shall apply. However, if the funding source of such FTN lending is from RMB proceeds provided by the head office of the bank, the amount of such FTN lending shall be counted towards the bank’s offshore lending quota under PBOC Notice 27 (see further Question 8 below). However, there seems to be different interpretations on how PBOC Notice 27 may still be relevant to lending through an FTN of a domestic bank which is not funded in RMB by the head office. Furthermore, where the source of funding comes from RMB proceeds provided by the head office, it is unclear whether the requirements (other than the lending quota) under PBOC Notice 27 apply to such lending. It is advisable to seek further clarification from the relevant authorities and legal counsel when structuring offshore lending transactions involving such features.

3. PBOC Notice 27 covers loans to which borrowers?

Any non-financial enterprise duly established outside the PRC.

It is not clear how to distinguish “financial” or “non-financial” enterprises (for example, whether such determination is based on the law of establishment, PRC law, or both), so it is hoped there will be clarification from the authorities on this issue in due course.

The residency or locations where a borrower operates are not relevant to whether it is within the scope of PBOC Notice 27 as its place of establishment is the sole criterion.

Individual borrowers are outside the scope of PBOC Notice 27.

4. What constitutes offshore lending?

Offshore lending under PBOC Notice 27 includes “direct” and “indirect” offshore lending:

“direct” lending: lending to offshore enterprises directly (regardless of the term of such lending)
“indirect” lending: provision of funds or other means to offshore banks (with a term exceeding one year) for the purpose of lending to offshore enterprises.

PBOC and SAFE have not yet clarified what constitutes the “provision of funds or other means”. For example, while a funded sub-participation by a domestic bank in a loan granted by an offshore bank exceeding one year is likely to be captured, it is unclear how a risk sub-participation would be treated.

5. Are trade facilities regulated under PBOC Notice 27

Yes. Domestic banks engaging in offshore trade financing shall comply with the requirements of PBOC Notice 27, including requirements relating to due diligence, data reporting, anti-money laundering, counter-terrorist financing and anti-tax evasion. However, trade financing for bona fide cross-border trade settlements is excluded from the offshore lending quota (see further Question 8 below).

6. Which offshore lending currencies are regulated under PBOC Notice 27?

All currencies.

It is a key feature of PBOC Notice 27 that it regulates offshore lending in RMB and other currencies. It is the first time offshore lending in RMB and foreign currencies are uniformly regulated.

In addition to expressly encouraging domestic banks to preferentially offer RMB loans to offshore enterprises, PBOC Notice 27 also provides incentives to domestic banks to lend in RMB due to the additional weighting of foreign currency loans when calculating offshore lending quotas (see further Question 8 below).

7. What are the permitted loan purposes?

PBOC Notice 27 provides that offshore loans should in principle be used to finance expenditures incurred within the business scope of the offshore enterprises, and expressly prohibits loan proceeds being applied towards:

securities investment;
transactions with fictitious backgrounds;
speculative or arbitrage transactions;
repayment of offshore debts under neibaowaidai (内保外贷)^[3] transactions; or
repatriation to the PRC including through inbound lending or equity investment. We understand that this does not restrict repatriation for funds for payment under export trade in goods and services.

To a certain extent, such express prohibition (in particular, the last two loan purposes above) under PBOC Notice 27 limits the types of loan transactions that domestic banks can participate in. From an offshore syndication perspective, if a loan facility includes both permitted and prohibited loan purposes (e.g. refinancing neibaowaidai loans), the mandated lead arrangers, in arranging the syndication, may consider adding tranches for different loan purposes and allow domestic banks which are subject to PBOC Notice 27 to only participate in those tranches which will not be applied towards a prohibited purpose.

8. What is the offshore lending quota?

PBOC Notice 27 requires that the “Offshore Lending Balance” of a domestic bank shall not exceed its “Offshore Lending Quota” based on the following formulae:

“Offshore Lending Balance” = aggregate outstanding offshore lending balance (in RMB and foreign currencies) + aggregate outstanding offshore lending balance (in foreign currencies only) x exchange rate risk conversion factor^[4]

“Offshore Lending Quota” = net Tier 1 capital of the domestic bank^[5] x offshore lending leverage ratio^[6] x macro-prudential adjustment factor^[7].

Certain loan businesses of a domestic bank, for example, trade financing for bona fide cross-border trade settlements, are excluded from the “Offshore Lending Balance”.

Both the "Offshore Lending Balance” and the “Offshore Lending Quota” are denominated in RMB. Any foreign currency loan shall be converted to RMB at the exchange rate on the drawdown date of the loan for the purpose of determining the “Offshore Lending Balance”. The exchange rate risk conversion factor, the offshore lending leverage ratio and the macro-prudential adjustment factor may be subject to adjustment by the regulators from time to time.

9. What are the implications on neibaowaidai registration and NDRC 2044 filing^[8] in offshore syndication?

If an offshore syndication comprises both offshore banks and domestic banks, it is useful to note the following:

any credit support provided by a PRC entity to all or any part of the loans participated in by domestic banks does not constitute neibaowaidai. However, the practice of SAFE in relation to neibaowaidai registration relating to credit support provided by a PRC entity to a syndicate comprising both domestic and offshore banks varies depending on the location of the relevant SAFE office. Early consultation with the relevant SAFE office is recommended.
NDRC 2044 filing is not required for all or any part of the loans participated by domestic banks, because they are not “foreign debts”. However, the practice of NDRC varies.

In the context of bilateral lending, given (a) credit support provided by a PRC entity in respect of cross border lending by a domestic bank does not constitute neibaowaidai and (b) cross border lending by a domestic bank does not constitute “foreign debt” under the NDRC 2044 filing regime, neither neibaowaidai registration nor NDRC 2044 filing is required when borrowing from domestic banks, and borrowers may find this advantageous from a regulatory perspective.

10. What is the potential impact of PBOC Notice 27 on offshore syndicated loans?

PBOC Notice 27 provides a unified framework to support and regulate offshore lending by domestic banks.

It is expected that more domestic banks will want to participate in offshore syndicated loans, which would lead to further development of the offshore syndication market, especially in Asia.
Offshore banks may see more competition from their PRC counterparts in securing mandated lead arranger roles.
Against a backdrop of US dollar rate hikes, it is an opportune time for more RMB lending by domestic banks, which would help to promote the internationalisation of the RMB.
PRC enterprises (or their subsidiaries) requiring funding offshore may benefit from the enlarged funding pool from domestic banks with which they may already be familiar and/or have existing business relationships in the PRC.
Mandated lead arrangers should carefully navigate the relevant regulatory requirements including neibaowaidai registrations and NDRC 2044 filing in the context of a syndication comprising both domestic and offshore banks.

Thank you Asia Pacific Loan Market Association (APLMA) for inviting us to feature in video on the latest PBOC 27 Circular with APLMA Vice Chairman, Eugene Lau.