[author: Jiamu Sun]

Introduction

On May 19, 2014, the State Administration of Foreign Exchange (“SAFE”) released Notice on the Promulgation of Foreign Exchange Administration Rules on Cross-border Guarantee (“Circular 29”) with a view to promoting cross-border guarantee activities and convertibility under capital accounts. Circular 29 took effect on June 1, 2014 and twelve[1] other SAFE regulations regarding cross-border guarantee will be abrogated.

Cross-border Guarantee Subject to Circular 29

Generally speaking, in a guarantee agreement, a guarantor promises to the lender and undertakes that if a borrower fails to perform its obligations as agreed upon in a loan agreement, then the guarantor shall fulfill such obligations (also known as “performance of guarantee”). The basic financing structures of a guarantee can be shown in the following chart.

Guarantee chart
Under Circular 29, cross-border guarantees fall into three categories: (a) domestic guarantee to foreign loans (????), which refers to the circumstance where guarantor has a domestic domicile while each of lender and borrower has a foreign domicile ; (b) foreign guarantee to domestic loans (????), which refers to the circumstance where guarantor has a foreign domicile while the lender and borrower have domestic domiciles; and (c) other forms of cross-border guarantee, which refer to, without limitation, the following four circumstances: i) domestic guarantor + domestic/foreign borrower + domestic/foreign lender, ii) foreign guarantor + domestic/foreign borrower + domestic/foreign lender, iii) domestic guarantor + domestic borrower + domestic lender + foreign registration of guarantee, iv) foreign guarantor + foreign borrower + foreign lender + domestic registration of guarantee. Current SAFE rules[2] have a much narrower scope and only cover the provision of guarantee to foreign parties by domestic institutions and foreign guarantee to domestic loans.

Changes to Domestic Guarantee to Foreign Loans

  • Circular 29 cancels the amount limit and pre-approval requirement of domestic guarantee to foreign loans;
  • Except for a general restriction that a borrower can only use the loans within the scope of its regular business, Circular 29 cancels special restrictions on net asset ratio and affiliated relations of guarantor and borrower[3];
  • Registration rather than pre-approval is the main regulative measure under Circular 29;
  • The approval requirements for the performance of guarantee are cancelled under Circular 29 and the performance of guarantee can be processed directly by the bank;
  • Registration of foreign debt, if any, with SAFE is required after the performance of guarantee.

Changes to Foreign Guarantee to Domestic Loans

  • Circular 29 provides that lenders must be domestic financial institutions and borrowers must be non-financial institutions. Additionally, the debt should be either regular loans in RMB and foreign currency or line of credit, but not entrusted loans;
  • A centralized registration of lenders, i.e., domestic financial institutions, should be required;
  • Lender is allowed to collect the debt on its own account in the event of performance of guarantee;
  • Lender is responsible for registering its foreign debt, if any, with SAFE after the performance of guarantee. However, such foreign debt is not counted towards lender’s own quota for regular foreign debt.

Regulations of Other Forms of Cross-border Guarantee

Circular 29 provides that domestic institutions are allowed to sign other forms of guarantee agreements, which are neither foreign guarantee to domestic loan agreements nor domestic guarantee to foreign loan agreements, on their own account without registering with SAFE. However, relevant rules regarding foreign debt registration, direct investment and securities investment should still be followed as before.

Looking Ahead

Circular 29 clearly provides that the validity of cross-border guarantee agreements is independent from SAFE’s approval or registration requirements. With SAFE stepping back and relaxing its foreign exchange controls, cross-border borrowers and lenders should be less worried about regulatory delays effecting their financings. In particular, as domestic borrowers, Chinese enterprises will see more financing opportunities overseas, which will promote their merger and acquisition activities.

[1] The twelve other SAFE regulations to be abrogated include: Detailed Rules for the Implementation of the Administrative Measures for the Provision of Foreign Guarantees by Domestic Institutions (Hui-Fa [97] No. 10), Notice of the State Administration of Foreign Exchange on the Administration of External Guarantees Provided by Domestic Institutions  (Hui-Fa [2010] No. 39), Notice of State Administration of Foreign Exchange on Foreign Exchange Control Relating to Pilot Small-sum Onshore Loans against Offshore Guarantee in Certain Areas (Hui-Fa [2013] No. 40), State Administration of Foreign Exchange, Issues Relevant to Renminbi Loans Secured by Foreign Exchange Supplementary Circular  (Hui-Fa [2005] No. 26), Notice of the State Administration of Foreign Exchange on Issues Relevant to Examination & Ratification of Its Local Branches’ Work on Foreign Guarantee of Domestic Loans Quota of Domestic Enterprises in 2013 (Hui-Fa [2013] No. 23), Circular of the State Administration of Foreign Exchange Concerning Relevant Issues on Making up the Registration of Foreign Debts and Foreign Sureties  ( [1999] No. 77), Notice of the State Administration of Foreign Exchange on Regulating the Authorization for Examining and Approving Foreign-oriented Guarantee Performance  (Hui-Fa [2000] No. 84), Circular of the State Administration of Foreign Exchange on How to Define Unauthorized Pledge of Foreign Exchange (Hui-Fa [97] No. 2), Reply of the State Administration of Foreign Exchange to Issues Relevant to Financial Institutions’ Renminbi Loans Guaranteed with Foreign Exchange ([1999] No. 56), Reply of the State Administration of Foreign Exchange on Issues of Registration of Pledge of Insurance Interests ( [2001] No. 144), Notice of the State Administration of Foreign Exchange on Issues Relating to Examination & Ratification of the Quota Balance of Financing Foreign-oriented Guarantees Provided by Domestic Banks in 2011  (Hui-Fa [2011] No. 30), Notice of the State Administration of Foreign Exchange on Transmitting and Implementing Supreme People’s Court’s Interpretation of Relevant Issues on Applying PRC Guaranty Law (Hui-Fa [2001] No. 6).

[2] Current SAFE rules regarding cross-border guarantee include: Measures on the Administration of External Guarantees Provided by Domestic Institutions effective on October 1, 1996, Rules for Implementing the Measures on the Administration of External Guarantees Provided by Domestic Institutions effective on January 1,1998 (to be abrogated from June 1, 2014), Notice of the State Administration of Foreign Exchange on the Issue of the Administration of External Guarantee by Domestic Institutions effective on July 30, 2010 (to be abrogated from June 1, 2014), Notice of the State Administration of Foreign Exchange on the Release of Administrative Measures for Foreign Debt Registration effective on May 13, 2013.

[3] Under Administrative Measures for the Provision of Guarantee to Foreign Parties by Domestic Institutions, effective on October 1, 1996, a domestic-invested enterprise may only provide guarantee for foreign parties against the external debt in connection with the part of investment made by the Chinese party in its directly affiliated subsidiary or equity participation enterprise. Where a trade-oriented domestic-invested enterprise provides guarantee for foreign parties, in principle the ratio of net assets to total assets thereof may not be less than 15%. Where a non-trade-oriented domestic-invested enterprise provides guarantee for foreign parties, in principle the ratio of net assets to total assets thereof may not be less than 30%.