The Provisional Regulation Governing Foreign Debt Management (abbreviated as Provisional Regulation) was jointly issued by the State Development Planning Commission (SDPC), the Ministry of Finance and the State Administration of Foreign Exchange recently.

The new regulation is believed to improve the legal framework of foreign debt, strengthen its management, standardize foreign capital borrowing, increase the transparency of foreign debt management and raise foreign capital’s utility efficiency as well as reducing foreign debt-related risks.

An official with the Foreign Investment Department of the SDPC recently answered the questions on the new regulation from Xinhua News Agency.

Question: What’s the purpose of strengthening and improving foreign debt management?

Answer: International practice has shown that the management of foreign debt, as an important factor of economic security, has a direct bearing on the healthy operation of a national economy and a stable financial mechanism. Financial crises in Asia and turbulence in South American finance are closely connected to the out-of-control state of debt-volume and its structure. China’s entry into the WTO shows that it has entered a new era of openness. It will continue to use foreign investment, improve foreign debt management, and keep a balance of its international payments. On a request to strengthen foreign debt management from the State Council, the SDPC, as well as the Ministry of Finance and State Administration of Foreign Exchange communicated the Provisional Regulation.

Question: What are the characteristics of the Provisional Regulation?

Answer: The Provisional Regulation was formulated on the basis of over 20 years of foreign debt management experience and is in accordance with the stability and continuation of current policy. The new characteristics to the regulation are as follows:

First, Provisional Regulation is the first of its type to manage all foreign debt. It strengthens continuation and transparency and makes the handling of foreign debt volume, and other aspects of foreign debt, easier.

Second, Provisional Regulation manages by classification. For example, for state sovereignty debt, the final borrowers should pay off the loan according to a re-loan deal. For international commercial loans, the classification of state-owned commercial banks, Chinese enterprises, foreign-funded enterprises and foreign-funded financial institutions determine their particular management.

Third, Provisional Regulation strengthens foreign debt control. Although China’s total foreign debt volume is kept at a suitable level, some domestic institutions continue to illegally raise debts and offer guarantees to dodge legal supervision. Provisional Regulation stipulates that all foreign debt, no matter what kind, should be monitored.

Question: Why does Provisional Regulation specially have a chapter for “foreign debt repayment and risk management”?

Answer: In recent times, our domestic capital has grown in size and is now abundant. Thus, China has tightened control over foreign loans, especially with international commercial loans, and encouraged enterprises to borrow for forex activities from domestic banks. Currently, the principal and interest paid for former foreign loans has exceeded the volume of newly borrowed foreign debt and so it is very important to strengthen foreign-debt repayment and risk management. Provisional Regulation stipulates that state sovereignty debt should be paid off by the final borrowers. Provisional Regulation asks that all foreign debt borrowers strengthen the risk management of their foreign debts.

Question: Why should the sum of long, medium and short-term foreign debt volume, borrowed by foreign-funded enterprises, be controlled within the difference between the total investment of a project and its registered capital?

Answer: Currently, foreign debts of foreign-funded enterprises accounts for one fourth of China’s total debt, so foreign debt needs to be monitored. At the moment, foreign funded enterprises can borrow foreign debt according to the difference between total investment and registered capital instead of waiting for approval. This illustrates the working combination of a nation’s macro-economic control and enterprise independence.

Question: How do we understand the sentence: “macro-control the foreign debts borrowing of the domestic foreign-funded financial institutions”?

Answer: Recently there has been a new type of foreign debt management problem appearing in foreign-funded financial institutions. Initially, China had adjusted the registration of foreign debt in 2001, and the foreign debt of domestic financial institutions with foreign investment was closely watched. The debts which domestic institutions borrowed from domestic foreign-funded enterprises were no longer calculated as foreign debt. Second, China became a member of the WTO in 2001 and lifted bans regarding location and clients of foreign banks in China. Foreign banks can now lend directly for forex activities to Chinese enterprises.

Provisional Regulation insists that foreign debt refer to the foreign exchange debt which domestic institutions owe to non-citizens and the debt which foreign-funded financial enterprises in Chinese territory borrow from non-citizens. Government can then conduct macro-economic control over the two kinds of debt.

For the specialty of management over foreign-funded financial companies’ foreign debts, special regulations will apply. The basic principle being that foreign debt volume control is monitored and in the meantime, it is convenient for forex activity loans from foreign-funded financial institutions.

Question: According to the definition of foreign debt in Provisional Regulation, debts which domestic institutions owe to non-citizens, in foreign currencies, are classified as foreign debts. What about these debts in Renminbi?

Answer: Foreign debt that is measured in foreign currency, and in its national currency, falls within foreign debt management. Since the advent of economic reform and greater openness in China, nearly all its foreign debts are foreign currency debts. Thus, foreign debt in Renminbi is not regulated by Provisional Regulation. However, as reform continues, debt in Renminbi will not be so unusual. For example, approved qualified foreign institutional investors can invest in the domestic stock market and the bonds that they buy will belong to Renminbi debt. Domestic financial assets management companies will also have foreign debts when transferring non-performing debt. For these and other relatively new problems, we will research and issue regulations accordingly.

(China.org.cn translated by Tang Fuchun, February 21, 2003)