There has been a significant and noticeable increase in RMB borrowings by foreign invested enterprises from PRC designated banks. The PRC government has played an important role in adding momentum to the trend towards more RMB financing by borrowers. There is little doubt that a major incentive for the PRC government to favor RMB financing is the virtually non-existent risks typically involved in RMB banks lending to borrowers. Such loans are either secured by letters of credit issued by foreign banks or by foreign currency cash deposits. These loans are favored as, in most cases, RMB financing is cheaper than US dollar financing.
RMB banks are only allowed to advance RMB loans to borrowers based on the security of a pledge of foreign currency deposits or foreign exchange guarantees provided by foreign banks (which guarantees could take the form of a standby letter of credit, or an unconditional and non-transferable bank guarantee). Further regulations also mean that RMB loans can now be used for meeting the needs of both fixed asset investments and working capital requirements of a borrower. Although the RMB loan remains capped at 5 years, it is no longer necessary to register foreign currency deposits or foreign exchange guarantees. As regards the source of the foreign exchange deposit, it has now been relaxed to include a borrower's own registered capital and/or current account income.
With the changes and clarifications recently made by legislators, no doubt there will be increasing numbers of borrowers who are able to obtain RMB loans from PRC banks. Despite the positive factors associated with RMB financing, investors should not overlook those persistent negative factors which have been impacting the PRC loan market as a whole since the onset of the Asian financial crisis, namely, the lack of appetite of foreign banks to take PRC credit risks, the difficulty of creating and perfecting security over PRC assets of borrowers, the inherent problems of the PRC legal system, etc. This may mean that only the most credit worthy borrowers will be able to take advantage of the trend towards more RMB financings in the short to medium term with the prospect of growth in this market going forward.
