Moody's Investors Service says that proposals aimed at easing approval requirements for cross-border guarantee policies, if implemented, would be credit positive for Chinese corporates.
One of the key components of the proposals, announced by China's State Administration of Foreign Exchange (SAFE) on 13 February, is to allow onshore companies to register cross-border payment guarantees with SAFE instead of seeking approval from the foreign exchange regulator.
Due to strict approval requirements on cross-border guarantees, an increasing number of China-incorporated companies, mostly large state-owned enterprises and property companies, have been using keepwell agreements and other credit support mechanisms such as equity interest purchase undertakings, to enhance the credit quality of bonds issued and/or guaranteed by their offshore subsidiaries.
However, such credit enhancement structures are more exposed to legal enforceability issues and regulatory risk than a group guarantee.
"An explicit guarantee from an onshore company with stronger credit gives investors more assurance that they will recover their principal in case the offshore bond issuer defaults. That, in turn, enables the offshore subsidiary to obtain lower funding costs and capture acquisition opportunities in a more timely manner," says Kai Hu, a Moody's Vice President and Senior Credit Officer.
The latest proposals follow the unveiling of a new policy on January 24 that will loosen restrictions on intercompany loans between Chinese corporates' onshore and offshore entities. In addition, that policy will simplify documentation requirements and remove certain limitations on the amount of dividends that a foreign invested company can repatriate to its foreign shareholders.
Both of these developments are aimed at easing capital control restrictions in China, and provide further evidence of the government's commitment to the economic reform agenda it outlined last year.