China eases restrictions on offshore lending in Shanghai zone

(Reuters) – China’s foreign currency regulator eased restrictions for companies registered in Shanghai’s recently established free trade zone (FTZ), increasing the amount of foreign currency companies registered in the zone can lend in offshore markets, according to an announcement posted on the FTZ’s website.

The new regulations issued by the State Administration of Foreign Exchange (SAFE) increase the amount of funds companies can lend to 50 percent of net ownership equity, up from 30 percent.

The rules also allow domestic banks registered in the zone to use up to 10 percent of foreign exchange held in a zone account for investment in China.

China has been moving to make it easier for multinationals and domestic companies in China to manage their foreign exchange, in particular by making it easier to borrow and lend offshore.

SAFE released a consultation paper detailing plans to make it easier for domestic companies to guarantee debt incurred overseas in mid February, shortly after it liberalised policies allowing intra-company loans across borders, which effectively allows firms to move currency to where it is most needed.

It is unclear to what extent the new policies will specifically resuscitate interest in the Shanghai FTZ, originally touted as the most significant reform pilot in decades but now widely considered a disappointment given the cautious scope and scale of the reforms.

There are already multiple pilot projects testing ways to liberalise China’s capital account, not all limited to the zone, and at the same time many other Chinese cities are applying to launch their own FTZs.

So far corporates have remained cautious about setting up shop in the zone, citing uncertainty over when the government will get around to implementing the promised aggressive reforms to currency and interest rates.

At the same time, speculators gambling on a new influx of corporate tenants have already driven up the price of industrial property in the zone.

Beijing appears to have taken notice of the issue, establishing a joint committee to improve bureaucratic coordination between the various financial regulators with occasionally overlapping jurisdictions in the zone.

Credit: Reuters