China Expands Pilot Foreign Debt Facilitation for High-tech SMEs
Although the ceiling foreign debt quota for Chinese enterprises has been increased from 2 to 2.5 times their net assets on 11 March 2020, high-tech start-ups that have limited net assets at the early stage could hardly find enough financing due to the low ceiling foreign debt quotas. In order to support the growth of high-tech small and medium-size enterprises (SMEs) and broaden their financing channels, the State Administration of Foreign Exchange of the PRC has announced on 19 March 2020 to expand the pilot scheme on cross-border financing for high-tech start-ups to include Shanghai (Shanghai Pilot Free Trade Zone), Hubei (Hubei Pilot Free Trade Zone and Donghu New Technology Industrial Development Zone in Wuhan), Guangdong and Shenzhen (Guangdong-Hong Kong-Macao Greater Bay Area). In the meanwhile, further efforts will be made to strengthen foreign debt facilitation for Beijing Zhongguancun Science City Haidian Industry Park. The ceiling foreign debt quota in the foregoing park has be increased from USD5 million to USD10 million now.
Local branches of the State Administration of Foreign Exchange have recently released relevant regulations to implement the foregoing pilot scheme. As of July, the following implementation rules and regulations have been announced.
- Shanghai Free Trade Zone
Shanghai Branch of the State Administration of Foreign Exchange issued a circular on 3 April 2020 to allow enterprises that meet the following conditions to incur foreign debt within a quota of USD5 million.
(1)
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Non-financial enterprises registered in Shanghai Free Trade Zone that have been established and operated for one year or more.
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(2)
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Enterprises that comply with the identification conditions stipulated in the Measures for the Administration of Identification of Hi-Tech Enterprises (Guo Ke Fa Huo [2016] No. 32), have obtained the hi-tech enterprises certificate from the State and obtained the qualification of hi-tech enterprises from the relevant departments at or above the provincial level. If it is a trading enterprise, it shall be classified as A grade in trading of goods.
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(3)
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The hi-tech enterprises that are supported by the State and the intellectual property rights meet the following requirements:
- have at least one Class I intellectual property rights, like invention patent (including national defense patent), new plant varieties, national crop varieties, national new drugs, national first-class Chinese medicine protected varieties, integrated circuit layout-design exclusive right and etc.
- have at least 3 Class II intellectual property rights, like utility model patent design patent software copyright (excluding trademarks) and etc.
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(4)
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In the past year, the income of high-tech products (services) accounted for 60% or more of the total income of the enterprise in the same period; the total R&D expenses incurred in China accounted for 60% or more of the total R&D expenses.
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(5)
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No record of administrative penalty for foreign exchange violations in the past two years. (Enterprises that have been established for less than two years shall have no record of administrative penalties for foreign exchange violations since the date of establishment.)
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- Shenzhen
Shenzhen Branch of the State Administration of Foreign Exchange issued a circular on 21 April 2020 to allow enterprises that meet the following conditions to incur foreign debt within a quota of USD5 million.
(1)
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Non-financial enterprises registered in Shenzhen that have been established and operated for one year or more.
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(2)
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Enterprises that have been recognized as hi-tech enterprises or fall in the list of hi-tech enterprises incubator of Shenzhen Science and Technology Innovation Committee. If it is a trading enterprise, it shall be classified as A grade in trading of goods.
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(3)
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No record of administrative penalty for foreign exchange violations in the past two years. (Enterprises that have been established for less than two years shall have no record of administrative penalties for foreign exchange violations since the date of establishment.)
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- Guangdong-Hong Kong-Macao Greater Bay Area
Guangdong Branch of the State Administration of Foreign Exchange issued a circular on 30 April 2020, which decided to carry out the pilot scheme in Zhuhai, Huizhou, Dongguan, Zhongshan, Jiangmen, Foshan, Zhaoqing and Guangzhou.
Enterprises that meet the following conditions are allowed to incur foreign debt within a quota of USD5 million.
(1)
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Non-financial enterprises registered in mainland cities of Guangdong-Hong Kong-Macao Greater Bay Area that have been established and operated for one year or more.
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(2)
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Enterprises that comply with the identification conditions stipulated in the Measures for the Administration of Identification of Hi-Tech Enterprises (Guo Ke Fa Huo [2016] No. 32), have obtained the qualification of hi-tech enterprises from the relevant authorities.
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(3)
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If it is a trading enterprise, it shall be classified as A grade in trading of goods.
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(4)
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No record of administrative penalty for foreign exchange violations in the past two years. (Enterprises that have been established for less than two years shall have no record of administrative penalties for foreign exchange violations since the date of establishment.)
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After the implementation of the foregoing policies, eligible high-tech SMEs located in those pilot cities that have limited net assets at the early stage could borrow money from overseas within the foreign debt quota approved by the local branches of the State Administration of Foreign Exchange. This will help them to ease their financing strain. Meanwhile, it will facilitate the introduction of foreign capital for start-ups and reduce their financing costs.
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