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SAFE to ease controls on offshore loan use

By Qiu Chen (Global Times)

08:25, June 18, 2012

The Chinese mainland will allow its domestic businesses to use loans denominated in foreign currencies issued from Chinese banks to finance overseas operations, in a bid to facilitate outbound investment and the overseas expansion of the nation's companies, the State Administration of Foreign Exchange (SAFE) announced Friday.

The move, which will go into effect on July 1, aims to ease the financing difficulties faced by many companies, especially medium-sized enterprises, when they plan to expand abroad, Zhou Yu, director of the Research Center of International Finance at the Shanghai Academy of Social Sciences, told the Global Times.

"It is relatively hard for overseas subsidiaries of medium-scale enterprises to get financing directly from foreign markets, especially compared to large, State-owned companies," Zhou said.

"By broadening their foreign currency financing channels, more companies will expand abroad, which may improve the overall return of the mainland's foreign investments and the efficiency of the allocation of its foreign currency reserves," he said.

Previously, companies could only finance their offshore operations with foreign currencies generated during the course of doing business, or purchased from commercial banks or other foreign capital pools approved by the SAFE, according to regulations issued by the administration in 2009.

Under the new regulations though, companies will be subject to a quota, set by the SAFE, on how much in foreign currencies they can borrow for use overseas. "I expect the government will not only control the volume of the foreign currency loans but also the industries where the money flows to, in order to control risks," Zhou said.

Nevertheless, the move represents another big step for the country as it eases controls on the capital market, said Hwang Dar-yeh, director of the Center for the Study of Banking and Finance at National Taiwan University. By allowing foreign funds to flow more freely out of the country, it will take some of the appreciation pressures off the yuan, Hwang said.

"As the mainland opens another channel for its foreign currency reserves to be invested overseas, there will be more demand for foreign currencies in the market, which will lead the yuan to depreciate or appreciate at a slower pace. A cheaper yuan can help boost mainland's exports, which will stimulate economic recovery," Hwang said.

Along with the rule that permits enterprises to inject foreign currency-denominated loans into overseas operations, the SAFE will also simplify the procedures and cancel some approval requirements for companies to transfer foreign currencies back into the country.

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