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Law and regulation of Covid-19 loan moratoriums in China

Table of contents
  1.  Description of the legislation
    1.  Is there a moratorium on loans legislation implemented in your jurisdiction?
    2. If no: Are there any ongoing discussions regarding a potential introduction of such measures?
    3. What is the name of the relevant legislation (“the Relevant Act”)? 
    4. What is the duration of the measures (period of moratorium)?    
    5. Does the legislation provide for an extension of the period of moratorium?
    6.  Is the moratorium mandatory, or can each borrower opt out should they wish to simply continue payments, or opt in if they want to be protected by the moratorium?
  2. Parties and agreements affected by the Relevant Act
    1. Is the moratorium available for both corporate and consumer loans?
    2. Who are the affected Lenders?
    3.  Does it make a difference whether loans are granted by a foreign entity and governed by foreign law?
  3. Impact on the loan agreements
    1.  Is there a cut-off date with respect to loan agreements to which the Relevant Act will apply (e.g. not applicable to loan agreements entered into after the cut-off date)?
    2.  Does the moratorium apply to principal only, or also to interest and/or fees?
    3. Will the maturity of the loan automatically be extended by the moratorium period?
    4.  Are repayments and interest which have become due and payable under the contract before the Relevant Act has come into force covered by the moratorium?
    5. Will lenders be able to terminate a loan due to an event of default other than non-payment (e.g. breach of financial covenants)?
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1. Description of the legislation

1.1 Is there a moratorium on loans legislation implemented in your jurisdiction?

No. A moratorium on loans has not been implemented in China through legislation. However, the People's Bank of China, the Ministry of Finance, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange together issued a circular on 31 January 2020 on further solidifying financial support for prevention and control of COVID-19 (the “Circular I”), in which several measures regarding moratorium on loans are briefly mentioned. Further, the China Banking and Insurance Regulatory Commission, the People's Bank of China, the National Development and Reform Commission, the Ministry of Industry and Information Technology and the Ministry of Finance together issued another circular (the “Circular II”, the Circular I and the Circular II are collectively referred to as the “Circulars”) on 1 March 2020 specifically on moratorium on loans granted to micro, small and medium-sized enterprises (“MSMEs”). According to the relevant statutory criteria, MSMEs are defined by the industries they engage in, the number of their employees and their (annual) business income. E.g. in the manufacturing industry, MSMEs are enterprises with less than 1,000 employees or less than RMB 400 million business turnover.

According to the Circulars, if an enterprise has been severely affected by the epidemic and has difficulties in making repayment when due, the relevant loan term can be extended or renewed. Further, for those persons hospitalized for treatment or quarantined due to the COVID-19, those quarantined for observation due to the epidemic prevention and control need, those participating in epidemic prevention and control work, and those temporarily losing income sources due to the impact of the epidemic, financial institutions shall give them preferential treatment as appropriate in terms of credit policies, flexibly adjust the arrangement for repaying consumer loans including housing mortgage and credit card receivable, and reasonably postpone the deadline for repayment.

1.2 If no: Are there any ongoing discussions regarding a potential introduction of such measures?

Based on the Circulars, it is generally up to each bank to decide whether and how it will implement a moratorium. Many commercial banks in China have implemented different measures regarding moratorium on loans under the instruction of the Circulars. For example, one of the measures implemented by Bank of China is that people in Hubei Province, who temporarily lose income sources due to the impact of the epidemic, can be given a 3-6 months delay repayment arrangement according to the actual situation.

1.3 What is the name of the relevant legislation (“the Relevant Act”)? 

N/A

As we mentioned above, no legislation is promulgated by the State but only some official circulars by some ministries.

1.4 What is the duration of the measures (period of moratorium)?    

N/A

In practice, the period of moratorium is subject to the measures of different banks. For loans granted to MSMEs, according to the Circular II, the period of moratorium may be at the maximum until 30 June 2020. 

1.5 Does the legislation provide for an extension of the period of moratorium?

N/A

According to the Circular II, for MSMEs that have been severely affected by the epidemic and require a long recovery period, an extension of the above-mentioned period of moratorium can be negotiated with the relevant commercial banks. 

1.6 Is the moratorium mandatory, or can each borrower opt out should they wish to simply continue payments, or opt in if they want to be protected by the moratorium?

N/A

For the moratorium mentioned in the Circulars, it is not mandatory. The borrower is entitled to continue to make contractual payments on the agreed dates. The lender is also entitled to decide whether and how it will implement a moratorium. 

2. Parties and agreements affected by the Relevant Act

2.1 Is the moratorium available for both corporate and consumer loans?

As we mentioned above, the moratorium under the Circulars is available to both commercial loans and consumer loans.  

2.2 Who are the affected Lenders?

Under the Circular, domestic financial institutions, e.g. domestic commercial banks, are affected.

2.3 Does it make a difference whether loans are granted by a foreign entity and governed by foreign law?

The Circulars do not cover the loans granted by a foreign entity and governed by foreign law. 

3. Impact on the loan agreements

3.1 Is there a cut-off date with respect to loan agreements to which the Relevant Act will apply (e.g. not applicable to loan agreements entered into after the cut-off date)?

N/A

Subject to the measures of different banks. 

For the loans granted to MSMEs, the moratorium applies to such loans which have been due from 25 January 2020.

3.2 Does the moratorium apply to principal only, or also to interest and/or fees?

N/A

Subject to the measures of different banks. 

For the loans granted to MSMEs, it is stipulated in the Circular II that the moratorium also applies to interests. The specific repayment plan for the deferred interests shall be negotiated between the parties.

3.3 Will the maturity of the loan automatically be extended by the moratorium period?

N/A

Subject to the measures of different banks.

3.4 Are repayments and interest which have become due and payable under the contract before the Relevant Act has come into force covered by the moratorium?

N/A

Subject to the measures of different banks.

3.5 Will lenders be able to terminate a loan due to an event of default other than non-payment (e.g. breach of financial covenants)?

N/A

Subject to the stipulations in the loan agreements.

Authors

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Portrait ofUlrike Glueck
Dr. Ulrike Glueck
Managing Partner
Shanghai