Meaning
Statutory limits on the gap between registered capital and the total investment amount determine the maximum external debt a foreign invested enterprise can borrow. These ratios are governed by the State Administration of Foreign Exchange and the Ministry of Commerce to prevent excessive leverage. The difference between the total investment and the registered capital is known as the borrowing gap.
Ratio Requirement
Mandatory tiers for capital density vary depending on the total scale of the investment project. For an investment under three million dollars, the registered capital must constitute at least seventy percent of the total. As the investment grows into the tens of millions, the required percentage of equity drops according to a sliding scale.
The calculation also accounts for the specific industry of the company, as certain sectors like real estate or finance are subject to even stricter capital requirements to mitigate systemic risk.
Financing Constraint
Companies that exceed the borrowing gap cannot register new foreign debt or obtain the necessary approvals for offshore loans. If the debt to equity ratio is not maintained, the enterprise loses its ability to remit interest payments to foreign lenders or provide security for overseas affiliates. The State Administration of Foreign Exchange monitors these balances through the annual foreign exchange reconciliation process.
Conversion Procedure
Increasing the borrowing capacity requires a formal increase in the registered capital to widen the gap. The debt to equity ratio must be recalculated and updated in the official articles of association before the local bank will process any new loan drawdowns. This administrative step involves filing with the market regulator and updating the enterprise’s record in the foreign investment information reporting system.
