China-related acquisition finance: SAFE confirms the 50% Assets Rule is dead

On 27 April 2017, China’s State Administration of Foreign Exchange (“SAFE”) published a Policy Q&A Paper (the “April Q&A”) in relation to its Notice to Further Promote the Reform on Foreign Exchange Administration and Improve the Verification of Authenticity and Compliance (国家外汇管理局关于进一步推进外汇管理改革完善真实合规性审核的通知(汇发【20173 )) (“SAFE Notice 3”).

The April Q&A has clarified that the so called “50% Assets Rule” has been abolished. This was the rule which prevented lenders from taking any onshore guarantees or security in an acquisition financing of an offshore target if the target group’s assets in China represented more than 50% of its total assets. This is a welcome development which may enhance the credit on China-related acquisition financings going forward. But investors should note that acquisitions involving no injection of proceeds onshore (as would be the case with a typical leveraged buyout) are likely to attract enhanced scrutiny from SAFE in the registration process.

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