Name: Notice on the Administration of Provision of Foreign Security by Onshore Institutions (the “Notice”)
Issuing authority: The State Administration of Foreign Exchange of the People’s Republic of China ( “SAFE”)
Effective date: 30 July 2010
Subject: Foreign security
The previous foreign security rules and their implementing rules, which were promulgated by SAFE in 1996 and 1997, have long been considered to be out of line with market practice and in need of overhaul. SAFE has now issued the Notice which makes significant changes to various aspects of the pre-existing regulatory regime for the provision of foreign security by onshore institutions. One of the most important changes that the Notice makes is that banks are now allowed to provide foreign security for financing purposes in respect of obligations of any offshore entity (previously a bank could provide foreign security only where such offshore entity was one in which a PRC entity has equity investment i.e. a PRC-invested offshore entity).
Highlights
Foreign security provided by onshore banks
- Pursuant to the Notice, foreign security is divided into two categories: foreign security for financing purposes and foreign security for non-financing purposes. Foreign security for financing purposes is defined as foreign security provided to secure financing obligations (such as loans, issues of bonds and financial leases) (“Foreign Security for Financing Purposes”). Foreign security for non-financing purposes refers to any type of foreign security provided for non-financing purposes (such as product quality guarantees and advance payment security deposits) (“Foreign Security for Non-Financing Purposes”).
- In terms of Foreign Security for Financing Purposes, previously, banks had to obtain SAFE approval where the underlying obligor was a PRC entity or an offshore SPV, or where the purpose of the underlying financing was to purchase shares in offshore entities. Under the Notice however, no such approval is required, so long as the provision of the foreign security is within the bank’s quota. In addition, so long as within their quotas, banks are allowed to provide Foreign Security for Financing Purposes whether or not the underlying obligor is a PRC-invested offshore entity.
- Banks may apply for quotas for the provision of Foreign Security for Financing Purposes on an annual basis. In principle, a bank’s quota should not exceed the lower of (a) 50% of its paid-up capital or working capital (as applicable); and (b) its net assets denominated in foreign exchange.
- With respect to Foreign Security for Non-Financing Purposes, banks can generally freely provide such foreign security without being subject to any quota requirements. However, it is stipulated in the Notice that, in respect of Foreign Security for Non-Financing Purposes provided by banks, either the beneficiary or the underlying obligor must be a PRC-incorporated entity or a PRC-invested offshore entity.
- Banks are no longer required to obtain SAFE approval for performance of their payment obligations under foreign security that they have provided.
Foreign security provided by onshore non-bank financial institutions or general corporates
- Foreign security provided by onshore non-bank financial institutions or general corporates usually requires SAFE’s approval on a case-by-case basis. However, any such non-bank entities that frequently provide foreign security may also apply for quotas. Within their quota, such non-bank entities can generally provide foreign security without having to obtain prior approval from SAFE. Note though that, under the Notice, the approval and quota requirements also apply to wholly foreign invested enterprises. As such, wholly foreign invested enterprises can no longer freely provide foreign security as they could under previous rules.
- There are certain specific requirements applicable to foreign security provided by non-bank entities. For instance, in the case of foreign security provided by non-bank financial institutions, the underlying obligor must be either a PRC-incorporated entity or a PRC-invested offshore entity, whereas in the case of foreign security provided by a corporate, the underlying obligor must be an onshore or offshore entity in which such corporate has invested in. In addition, the amount of the obligor’s net assets value must be positive.
If you would like to discuss anything regarding this alert please contact either Fang Jian or Benjamin Liu.
