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Legal Update

SAFE Issues New Rules on Foreign Security

26 August 2010
Mayer Brown JSM Legal Update

Introduction

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.

Main Points

The main points of the new rules are:

Banks

  1. Banks can issue FFS without SAFE approval, provided that they are within the approved Quota4. Banks issuing FFS within the Quota will only need to submit monthly reports to SAFE. SAFE will no longer issue registration proof for any security provided by these banks.

  2. Banks can issue non-FFS without being subject to the Quota or SAFE approval, provided that:
  1. they comply with the overall risk control requirements of the China Banking Regulatory Commission; and
  2. the secured party or the beneficiary is either:
    1. a Chinese entity; or
    2. a foreign entity established or owned (directly or indirectly) by a Chinese entity.
    In other words, the foreign security must have a "China connection" in addition to the Chinese security provider.

Non-Banks and Ordinary Enterprises

  1. Non-banks and ordinary enterprises can only issue FFS and non-FFS without prior SAFE approval, provided that:

    1. they have applied for, and been granted, the Quota approved by SAFE5; and
    2. they are within the approved Quota.

    However, they still need to register the security with SAFE within 15 days of execution of the security document.

  2. Non-banks and ordinary enterprises which are not subject to the Quota can only issue FFS and non-FFS with SAFE approval on a case-by-case basis before entering into a security document. They must also register the security with SAFE within 15 days of execution of the security document.

  3. Non-banks and ordinary enterprises issuing foreign security are also subject to the following general requirements:

    1. Qualification of the secured party

      In the case of a non-bank, the secured party must either be:

      1. a Chinese entity; or
      2. a foreign entity established or owned (directly or indirectly) by a Chinese entity.

    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.

    1. Financial status of the secured party

      1. The net asset value of the secured party must be a positive number; and
      2. The secured party must have been profitable for at least one year out of the last three years (or five years for resource development companies). If it has been established for less than three years (or five years for resource development companies), this requirement does not apply.

Conclusion

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 ( )

Learn more about our PRC offices, Banking & Finance, Asset Finance, Leveraged Finance, Structured Finance and Shipping practices.


Endnotes:

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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