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China has increased the leverage ratio for banks’ overseas loans to bolster financial services in supporting the real economy, as well as promoting trade and investment.
The leverage ratio for overseas loans at wholly foreign-owned banks, joint venture banks, and foreign bank branches operating in China has been raised from 0.5 to 1.5, according to a notice issued by the central bank and the foreign exchange regulator. The same change applies to financial institutions established in Mainland China by banks from Hong Kong, Macao, and Taiwan.
Additionally, the leverage ratio for the Export-Import Bank of China’s overseas loans has been increased from 3 to 3.5.
This leverage ratio is a multiplier used by China’s financial regulators to determine the maximum permissible balance of overseas loans that offshore banking entities can extend within China. The cap on overseas loans is calculated by multiplying their net Tier 1 capital, the overseas loan leverage ratio, and a macro-prudential adjustment factor.
Furthermore, regulations now raise the maximum allowed overseas loan balance from 2 billion CNY (approximately $293 million) to 10 billion CNY (around $1.5 billion). This adjustment aims to better support foreign banks and the Export-Import Bank of China by boosting their capacity to leverage their competitive advantages and meet the reasonable financing needs of foreign firms operating abroad.
If a bank’s existing overseas loan limit is below 10 billion CNY, the new regulation stipulates that the ceiling will be set at 10 billion CNY.
As the overseas lending business has grown, some banks have been approaching the previous upper limits of their overseas loan balances. A senior official from the central bank’s relevant department noted that these regulatory adjustments take into account the relatively small business scale of various banks and the limited capital of foreign banks operating in China, leading to an increase in both their overseas loan leverage ratios and loan balance caps.
The regulations also specify that if domestic banks lend to overseas companies by providing funds to foreign banks for maturities exceeding one year—whether in yuan or foreign currencies—the foreign banks must comply with the laws and regulations of their respective countries or regions.
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