Beijing is investigating fraudulent declarations of domestic assets made to obtain overseas loans, regulators said on Wednesday, as part of a broader crackdown on capital outflows.
But the forex regulator took pains to reassure that the common practice of pledging domestic assets against loans issued by Chinese banks’ overseas branches for trade or investment — known in Chinese as neibao waidai — was still legal as long as borrowers complied with regulations.
The State Administration of Foreign Exchange said on Wednesday it would “guide financial institutions to step up compliance management and risk control of neibao waidai and to severely crack down on fake or malicious collateral”. It denied it was targeting any companies.
The use of inflated values on the collateralised assets — which might include pledged equity shares — increases the risk that Chinese banks will be left holding the bag in the event of a default.
In some “malicious” cases companies defaulted on loans overseas as part of scheme to move money out of the country, Chinese lawyers said. Other examples include lawsuits overseas where a plaintiff and defendant collude in lodging a suit, with the intention of moving the settlement money abroad.
Regulators have allowed Chinese companies to use onshore collateral for offshore acquisitions for several years. However, in line with a broad attempt to staunch capital outflows late last year following a record year for M&A, companies were required to seek additional approvals from the regulators for these types of transactions.
In June, China’s bank regulator ordered domestic lenders to assess the “systemic risk” presented by “some large enterprises” involved in overseas buying sprees.
Three people involved in Chinese cross-border transactions said the review by the banking regulator has been broadened to include more financial and monetary watchdogs such as Safe and NDRC.
Given the complex and changing nature of the neibao waidai arrangement, one person familiar with how the regulator operates said: “It’s not surprising to see Safe reviewing its role in this now.”
Safe said in response to queries: “Growth of neibao waidai is stable and it is developing healthily.”
One London-based banker said: “The main focus is whether domestic collateral was used to get loans overseas. Another aim is to find out whether shadow finance was used to buy the assets that were used as collateral.”
The bank regulator’s June action was seen as targetingAnbang, the insurer, Dalian Wanda, the property group, HNA, the airline to banking conglomerate, and Fosun, the consumer conglomerate.
The proportion of Fosun’s overseas loans using domestic collateral is “under 1 per cent”, a Fosun spokesman said, adding that it is a “normal means of financing” for companies. Anbang, HNA and Wanda declined to comment.
The four companies have taken drastic measures to allay concerns over the sustainability of the overseas empires they have built up during the past five years.
Wanda announced a massive sell-off of domestic assets to a rival property developer. HNA reconfigured its shareholding structure in recent weeks to include a New York-based non-profit that it says may ultimately hold its founders’ shares.
Talk of probes has been mixed with rumours the companies have been unable to initiate purchases or close deals, which the companies have taken pains to deny.
Anbang, whose founder and chairman has been detained since June, denied reports that it is being asked to sell some of its overseas assets. “At the moment, Anbang has no plans to sell its overseas assets. Currently all Anbang businesses and operations are normal; it has enough cash and is sufficiently solvent,” the company said.
Additional reporting by Archie Zhang and Yuan Yang in Beijing