Pilot Development of Cross-border RMB Loans in Qianhai District

by Sheppard Mullin Richter & Hampton LLP

The first batch of cross-border RMB loan agreements were signed on January 28, 2013. A total of 15 lenders, including HSBC Holding Plc and Industrial & Commercial Banks of China (Asia) Ltd., will provide about RMB 2 billion ($321 million) of cross-border RMB loans to companies in Qianhai (前海 in Chinese, a financial pilot zone in Shenzhen, Guangdong Province, China).

These transactions come after the official kick-off of the cross-border RMB loan pilot in Qianhai. The Shenzhen branch of the People's Bank of China (“PBOC”) also issued the Rules for the Implementation of the Interim Measures for the Administration of Cross-Border RMB Loans in Qianhai (“Implementation Rules”). This will accelerate the development of the cross-border RMB loan business, and further spur the demand for RMB loans and the flow of RMB between the Chinese mainland and Hong Kong. The Implementation Rules impose the following requirements on such cross-border borrowing activities:

1. Requirements on the relevant parties and the loan projects

The Implementation Rules clearly point out that companies registered and doing business or making investment in Qianhai may borrow RMB loans from Hong Kong banks. The Shenzhen branch of the PBOC will estimate the annual balance of Qianhai cross-border RMB loans in the light of the development of the relevant RMB business, the demands of Qianhai's construction and development, and the country's macroeconomic control. Previously, it was rumored that Qianhai cross-border loans would be unilateral loans of Hong Kong banks to Qianhai companies. However, China Construction Bank and Bank of Communications signed contracts with two Hong Kong companies, revealing that the Qianhai cross-border loans are bilateral loans, which are substantial cross-border RMB loans.

The Implementation Rules also provide that the tenor and interest rate of such loan will be determined by the borrower and the lender. Such flexibility is a major development in the government-managed interest-rate system in China.

2. Requirements on the application procedures for the loan projects

Before seeking cross-border RMB loans, the Qianhai companies must first file for record at the Shenzhen branch of the PBOC through their domestic settlement bank. They shall present their business licence, letter of intention for the loan, description of use of proceeds, and relevant credit reports. They may then apply to a Hong Kong bank for cross-border RMB loan with the Qianhai Cross-Border RMB Loan Record Sheet and other documents. The record sheet is only valid for three months.

After completion of the filing, the companies must open an account at a domestic settlement bank for receiving the loan proceeds from Hong Kong (not for cash receipt and payment business). Before depositing the loan proceeds into this account, they must present to the bank the description of use of proceeds and the record sheet issued by the Shenzhen branch of the PBOC. When using the proceeds, the companies must also present to the domestic bank relevant proofs for the use of proceeds and make payments with the loan proceeds only after obtaining a written reply from the Hong Kong lending bank.

3. Restrictions on the use of the loan proceeds

The Implementation Rules impose strict control on the use of the cross-border RMB loans in Qianhai, and provide that the use of the proceeds shall comply with the requirements set out in the catalogue for Qianhai's industrial development, and priority will be given to loan demands for use in imports and overseas payments. The proceeds of these loans cannot be invested in negotiable securities and other financial derivatives, entrustment loans, wealth-management products, and property not for the borrowers' own use. Such restrictions are consistent with the previous provisions on cross-border RMB borrowing, and are mainly to prevent the proceeds of these loans from being used for speculative purposes.

With the development of the cross-border RMB loans, Qianhai will be converted into a modern service industry hub for the long term and mutually beneficial economic development of both Hong Kong and Shenzhen. The pilot development of the cross-border loans in Qianhai will enhance the enthusiasm and innovation of the offshore RMB market in Hong Kong.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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