On 19 May 2014, the State Administration of Foreign Exchange (“SAFE”) promulgated the Provisions on Administration of Cross-border Security (“Provisions”). The Provisions took effect on 1 June 2014. Upon the effectiveness of the Provisions, twelve past SAFE regulations dealing with cross-border security were abolished.
1. Categories of Cross-border Security
Under the Provisions, cross-border security is divided into the following three categories:
a) Onshore Security for Offshore Debt, i.e. the security provider is registered within the PRC and both the debtor and the creditor are registered outside of the PRC;
b) Offshore Security for Onshore Debt, i.e. the security provider is registered outside of the PRC and both the debtor and the creditor are registered within the PRC;
c) Other Types of Cross-border Security, i.e. cross-border security other than those mentioned in items 1 a) and b) above. For example, both the security provider and the debtor are registered within the PRC and the creditor is registered outside of the PRC.
2. Key Changes
The Provisions brought considerable changes to the current regime of cross-border security. The major changes are set out below.
a) Under the past regulations, if a bank in China provided security in favour of a foreign entity for a financing project, it could only do so within its annual cross-border security quota. In addition, for non-banking financial institutions and companies, a prior approval from the SAFE had to be obtained before it provided a security in favour of a foreign entity for a third party’s debt. According to the Provisions, neither the annual cross-border security quota for banks nor the prior approval for non-banking financial institutions and companies will be required any more.
b) In addition, under the past regulations, if a domestically-owned enterprise took out a loan from a bank in the PRC and requested one of its offshore affiliates to provide a security in favour of the bank for the loan, it had to apply to the competent SAFE for a so-called “quota of offshore security for domestic loan”. This quota requirement did not apply to foreign invested enterprises (“FIEs”). However, according to the Provisions, now also for domestically-owned enterprises there is no quota requirement. Therefore, in the future it will be easier for a domestically-owned enterprise to obtain security from its offshore affiliates for its domestic loans.
After performance of the security obligations by the offshore security provider, it has a recourse right against the borrower in the PRC. Under the past regulations, if the borrower is an FIE, the entire amount of the said debt would take up its foreign debt quota. However, the Provisions provide that the aggregated amount of such debts shall not exceed the audited net asset value of the borrower of the last fiscal year and only any amount exceeding such audited net asset value will take up the foreign debt quota of the borrower. In other words, under the Provisions, if any such debt equals to or is lower than the audited net asset value of the borrower of the last year, its foreign debt quota will not be taken up so that the borrower can reserve its foreign debt quota for other purposes. This increases the financing capacity of the borrowers.
c) With regard to “Other Types of Cross-border Security”, the Provisions provide that unless explicitly required by the SAFE, no registration or filing is required. Therefore, for example if a borrower in the PRC takes out a loan from abroad and mortgages its assets in favour of the foreign lender, such mortgage shall not be registered with the SAFE any longer because the current cross-border security regulations which require such registration have been abolished upon the effectiveness of the Provisions. This understanding has also been orally confirmed by the officials of the SAFE Shanghai.
3. The Provisions
streamline the SAFE administration of cross-border security and offer more flexibility on the provision of security in cross-border transactions. However, with regard to individual security providers, the Provisions still only allow foreign individuals to provide security in favour of a bank in China under the mode of “Offshore Security for Onshore Debt”. Chinese individuals, e.g. individual shareholders of privately-owned companies, still cannot give personal guarantees in favour of a foreign entity for debts of their onshore and offshore companies.