On 30 July 2010, China's State Administration of Foreign Exchange (SAFE) issued a Notice on the Administration of the Provision of Security to Foreign Entities by Domestic Institutions.
The Notice introduces changes to the current rules governing foreign security granted by Chinese institutions. Under the new regulations, banks have much more freedom and flexibility in providing foreign security. While non-banks are generally still subject to case-by-case approval from SAFE when providing foreign security, they can now enjoy a more relaxed regime if they are qualified and approved by SAFE.
Under the new rules, foreign security is defined to include "financing foreign security"1 (FFS) and "non-financing foreign security"2 (non-FFS). Chinese institutions are classified as banks, non-bank financial institutions and ordinary enterprises3. Each of these is subject to different rules.
The main points of the new rules are:
In other words, the foreign security must have a "China connection" in addition to the Chinese security provider.
- they comply with the overall risk control requirements of the China Banking Regulatory Commission; and
- the secured party or the beneficiary is either:
- a Chinese entity; or
- a foreign entity established or owned (directly or indirectly) by a Chinese entity.
Non-Banks and Ordinary Enterprises
However, they still need to register the security with SAFE within 15 days of execution of the security document.
In the case of a non-bank, the secured party must either be:
In the case of an ordinary enterprise, the secured party must either be a Chinese or a foreign entity established or owned (directly or indirectly) by the ordinary enterprise.
The improved regulatory regime has greatly simplified the administrative procedures for Chinese institutions to grant foreign security. It will no doubt be welcomed by both domestic and foreign financiers and companies as it allows for easier access to financing in the Chinese markets.
For inquiries related to this Legal Update, please contact:
Alastair MacAulay ( )
1. Defined to mean any foreign security issued for contracts of a financing nature, such as loans, bonds, financing leases, etc.
2. Defined to mean any foreign security other than foreign security of a financing nature, such as guarantees, payment guarantees, project completion guarantees, etc. Refund Guarantees in respect of shipbuilding contracts also fall within this category.
3. Defined to mean non-financial institutions established under PRC law which are neither banks nor non-bank financial institutions.
4. Banks need to apply for the Quota before 15 April each year. Generally speaking, the annual Quota should not exceed the lower of: (i) 50% of the Bank's combined RMB and foreign currency paid-up capital or working capital (as applicable); or (ii) the Bank's net foreign currency-denominated assets.
5. Certain conditions have to be met in order for non-banks and ordinary enterprises to apply for, and be granted, the Quota, including: frequently providing foreign security and having a standardised internal management system.
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