• Guiding Opinions on Providing Stronger Support of Financial Services for the Adjustment and Promotion of Key Industries and the Curbing of Overcapacity in Certain Industries
  • February 19, 2010 | Authors: John V. Grobowski; Yiqiang Li
  • Law Firm: Faegre & Benson LLP - Shanghai Office
  • In an effort to broadly shape China's economic growth, four powerful financial regulators—the People's Bank of China, the China Banking Regulatory Commission, the China Securities Regulatory Commission and the China Insurance Regulatory Commission—have jointly issued rules designed to steer lending inside China toward designated "key" industries and away from others in which there is already excess capacity, that consume large amounts of energy, or that produce extensive pollution. The Guiding Opinions on Providing Stronger Support of Financial Services for the Adjustment and Promotion of Key Industries and the Curbing of Overcapacity in Certain Industries (Financial Support Opinions), which were issued and took effect on December 22, 2009, provide detailed guidelines for financial institutions, such as banks and securities firms, and also outline a number of initiatives intended to provide financial support for industrial restructuring in China.

    The Financial Support Opinions embody a series of plans issued since mid-2009 by China's State Council reflecting its desire to promote the development of ten key industries in China (logistics, automotive, light industry, textile, shipping, electronic information, equipment manufacturing, steel, nonferrous metal and petrochemical). The Financial Support Opinions also reflect ideas contained in the State Council's Circular of Various Opinions Concerning Guidance for the Healthy Development of Industries by Curbing the Overcapacity of Certain Industries and Construction of Redundant Projects. Another objective is to reduce pollution and support development of China's low-carbon economy.

    Optimization of China's Credit Structure

    The Financial Support Opinions require banks to guarantee a sufficient supply of credit to enterprises and projects that meet market entry thresholds and conform to the adjustment and promotion plans for key industries. In addition, banks are required not to grant loans to projects that do not conform to industrial policies; that fall short of market entry thresholds; that fail to meet technical standards; or that lack sufficient capital. Furthermore, the Financial Support Opinions require banks to stringently examine loans for projects within industries deemed to be over capacity before granting approval.

    Banks are encouraged to offer syndicated loans to leading enterprises in key industries. For small- and medium-sized enterprises in key industries, the Financial Support Opinions require banks to offer loans with reasonable loan terms, interest rates and repayment methods. For enterprises that have exhibited poor performance but are in a promising market and good credit history, banks should actively provide loan support as requested.

    Innovation in Financial Products and Services

    The Financial Support Opinions encourage banks to strengthen their efforts to research and develop innovative financial products and to expand the range of allowable collateral for loans.

    The Financial Support Opinions call for optimization of automotive consumer credit services by legalizing and standardizing investigation procedures, automotive mortgages, loan guarantees and the treatment of defaults.

    In order to meet the financing demands of scientific and technologic enterprises in key industries, the Financial Support Opinions encourage the development and support of financial service platforms by venture capital enterprises, financial institutions and intermediaries. In addition, the opinions support the establishment of specialized funds through which local governments provide a monetary guarantee in order to help young scientific and technical enterprises get bank funding with the pledge of intellectual property rights.

    Diversification of Financing Channels for Enterprises in Key Industries

    To expand the financing channels available for enterprises in designated key industries, the Financial Support Opinions call for innovation in the development of bond products that match the needs of such enterprises. The opinions also call for support of the issuance of corporate bonds, short-term financing bills and medium-term notes, and improvements in the system of initial public offerings—as well as the healthy development of ChiNext, the Nasdaq-like growth-oriented stock market that opened in Shenzhen last fall.

    In light of the enormous amount of private capital currently active in Chinese markets, the Financial Support Opinions call for increased participation of private capital in the promotion of and adjustments in key industries. The opinions also encourage local governments to support the establishment of and investment in private equity and venture capital funds. In addition, qualified domestic listed companies are encouraged to engage in outbound mergers and acquisitions.

    Promotion of M&A Activity and Restructuring, Implementation of China's "Go-Abroad" Strategy

    In an effort to boost M&A activity and the restructuring of qualified enterprises, the Financial Support Opinions call for improvements to the exit system for equity investment and the regulation of intermediary services provided by securities firms for mergers, acquisitions and the restructuring of listed companies. Listed companies are encouraged to make payments for such activity through shares, cash and a combination of multiple financial instruments.

    To support China's "go-abroad" (outbound investment) strategy, the Financial Support Opinions encourage banks to grant inbound and outbound M&A loans for enterprises engaging in mergers, acquisitions and restructurings. The opinions also encourage local governments to help local enterprises undertake mergers, acquisitions and restructurings through the provision of finance discounts and the establishment of M&A funds.

    The Financial Support Opinions require the further simplification of procedures for trade credit registration, with a view to offering greater convenience for product exporting and technology importing by enterprises in key industries.

    According to the Financial Support Opinions, relevant supporting measures for renminbi settlement of cross-border trade will be formulated. The pilot geographic scope will be expanded for renminbi settlement of cross-border trade, and the pilot enterprises will also increase.

    Curb of Overcapacity in Certain Industries

    The Financial Support Opinions require banks to refrain from granting loans to projects that do not conform to plans of adjustment and promotion for key industries and relevant industrial policies, in particular projects that the government has publicly promised to eliminate in the Circular of Various Opinions Concerning Guidance for the Healthy Development of Industries by Curbing the Overcapacity of Certain Industries and Construction of Redundant Projects.

    To support the development of China's low-carbon economy, financial support for enterprises and projects that consume large amounts of energy and produce significant pollution is restricted.

    Conclusion

    The Financial Support Opinions emphasize the importance of financial services to China's industrial restructuring efforts, and provide financial institutions with guidance on how to employ financial instruments for industrial restructuring. The opinions require local branches of the four agencies that jointly issued the Financial Support Opinions to forward it to financial institutions within their respective jurisdictions, and to carry out the work of enforcing and implementing the policy. Therefore, we can expect supporting rules and regulations to be issued by local agencies. Whether local government branches and agencies will fully and strictly enforce the Financial Support Opinions, as is expected by the central government, remains unknown.