China Eases Offshore Funding Limit for Foreign Banks

Bloomberg News
·3 min read

(Bloomberg) -- China’s central bank raised the limit on how much smaller lenders and foreign banks operating in the country can borrow offshore, a move that will ease a funding shortfall and give a push to expansion plans for firms such as HSBC Holdings Plc.

Their ability to borrow outside of China was expanded this week after the People’s Bank of China raised the leverage ratio for such funding to 2 from 0.8 for institutions with capital of less than 100 billion yuan ($15.6 billion), said people familiar with the decision, who asked not to be identified as the matter is private. Qualified banks will be given a 10 billion yuan initial quota, said the people.

PBOC Governor Yi Gang on Monday met with delegates of foreign banks to discuss their business needs and their development in China. Easing offshore borrowings will be to boon to lenders including HSBC and JPMorgan Chase & Co. since their onshore operations have been handicapped by limited branch networks and access to deposits.

PBOC didn’t immediately respond to a request seeking comment.

China’s financial markets are a potent lure for the world’s biggest banks, with billions of profits on the line from investment banking to wealth management. HSBC, Standard Chartered Plc and Citigroup Inc. became the first foreign banks allowed to set up locally-incorporated subsidiaries in China around 2007. Beijing has continued to relax rules for foreign firms in the subsequent decade, including removing a $10 billion threshold to set up local units.

Still, the banks face stiff competition from domestic lenders, especially in consumer finance, and in recruiting top talent, which has made expanding in China challenging. High capital requirement, limited funding and regulatory requirements have also proved onerous.

Citigroup Inc. last month announced plans to exit its retail business in China and 12 other markets, saying it didn’t have the scale it needed to compete. Overall, international banks had a 1.2% share of assets in 2020 in Asia’s largest economy, compared to 1.8% in 2010, McKinsey & Co. data showed.

The latest step may help small local Chinese banks after the regulators earlier this year curbed their ability to tap deposits outside their home base through tie-ups with financial technology platforms.

The increased borrowing is unlikely to add much pressure to the recent yuan rally because foreign financial institutions as well as multinational companies are still subject to a foreign debt quota. China has been wary of offshore borrowings as it seeks to ensure the financial system as a whole is not too exposed to foreign debt that led to the Asian Financial Crisis in 1997.

China in December asked onshore financial institutions, including local and foreign lenders, to limit the amount of foreign-currency debt they raise via channels such as interbank borrowing in the overseas market, people familiar had said. That move significantly curbed foreign banks’ business and their ability to serve overseas clients as many breached the cap, according to Wang Zhiyi, Chairman of Cross-Border Finance Research Institution.

The Chinese currency has rallied 2.9% in offshore markets this quarter, making it the best performer in Asia. Foreign funds have piled into the yuan as the economy strengthened and as they sought higher yields.

Recent comments by a central bank official in a state-backed magazine -- which was later retracted -- have also stoked expectations that it could let the currency strengthen to offset higher commodity import costs.

(Updates with analyst comment in the 10th paragraph.)

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