On 26 January 2017, the State Administration of Foreign Exchange (SAFE) of China released a Circular on Further Advancing the Reform of Foreign Exchange Administration and Improving the Examination 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》) (the New SAFE Rules). Taking effect as of the date of promulgation, the New SAFE Rules, among other things, expressly removed the restrictions on the repatriation of proceeds of an offshore debt under a neibaowaidai structure (i.e. guarantee or security provided by a Chinese onshore entity for a debt owed by an offshore debtor to an offshore creditor).
Relaxation of Repatriation of Proceeds
On 19 May 2014, SAFE issued the Foreign Exchange Administrative Provisions on Cross-Border Security (《
跨境担保外汇管理规定》) and its implementation guidelines (collectively, the
2014 SAFE Regulations) which relaxed control over the provision of cross-border guarantee or security. Please refer to our bulletin on the 2014 SAFE Regulations by clicking
here. Notwithstanding the relaxation of the approval/registration requirements of a
neibaowaidai structure, under the 2014 SAFE Regulations, the proceeds of an offshore debt under a
neibaowaidai structure cannot be repatriated into mainland China, whether directly or indirectly, and whether by way of equity investment or lending (which includes direct or indirect equity investment in an offshore company where 50% or more of its assets are located in mainland China) (the
Repatriation Restrictions). On 14 September 2015, the National Development and Reform Commission (
NDRC) promulgated the Notice on Accelerating Reform on the Administration of Filing and Registration of Foreign Debts Issued by Enterprises (《
国家发展改革委关于推进企业发行外债备案登记制管理改革的通知》) (the
NDRC Circular), which allows for the repatriation of proceeds of a foreign debt back to mainland China. Please refer to our bulletin on the NDRC Circular by clicking
here. However, the NDRC Circular is silent on how this relaxation is to be reconciled with the Repatriation Restrictions, which created uncertainty on the actual repatriation process. In practice, we understand that the repatriation of the offshore debt proceeds under a
neibaowaidai structure is allowed in certain locality subject to the case by case approval of SAFE. The New SAFE Rules now expressly allow the repatriation of the proceeds of an offshore debt under a neibaowaidai structure to mainland China, directly or indirectly, including by way of lending or equity investment and provide a basis of operation for SAFE for the repatriation process. Although the New SAFE Rules are silent, and it is yet to be officially clarified by SAFE, based on our anonymous consultation with some local branches of SAFE, the offshore financing proceeds under a
neibaowaidai structure may be repatriated into mainland China to be applied against: (a) the financing of the acquisition of the shares in an offshore company where 50% or more of its assets are located in mainland China; and (b) refinancing the existing debt of an offshore debtor, the proceeds of which were repatriated to mainland China.
Practical Implications
As the Repatriation Restrictions are now relaxed, offshore lenders may take guarantee or security from mainland China entities even if the proceeds of the offshore financings will ultimately be used in mainland China. Thanks to this relaxation, neibaowaidai may become a more flexible financing structure to enable the domestic enterprises to fully leverage the onshore and offshore loan markets to obtain financing. This is in line with the PBOC Circular on Issues concerning the Macro and Prudential Administration of Full-covered Cross-border Financing (《中国人民银行关于全口径跨境融资宏观审慎管理有关事宜的通知》) (issued on 11 January 2017) which increased the foreign debt borrowing headroom of PRC domestic enterprises, both of which are likely to encourage more inbound funding.
At the same time, it should be noted that the New SAFE Rules and permission for repatriation of offshore debt proceeds into mainland PRC do not adjust the existing rules relating to the incurrence of foreign debt by onshore entities (including, for certain entities such as real estate WFOEs, the current restriction on the incurrence of any foreign debt).
However, it is not clear from the New SAFE Rules whether the existing requirements on the use of proceeds for offshore bond issuance under neibaowaidai, including proceeds to be applied towards an offshore project to which an onshore entity has an equity interest in and whether the offshore project must be approved by the relevant authorities, still apply. Potential issuers should consult the relevant SAFE office to seek further guidance on the application of such requirements.
