Following the pilot program conducted from January 25, 2016, in the Fujian Guangdong, Shanghai and Tianjin free trade zones, the People’s Bank of China (“PBOC”) issued an implementation circular on April 29, 2016 (“the Circular”), to further extend the new macroeconomic management regime on overseas financing nationwide.

The Circular, which took effect on May 3, 2016, allows the State Administration for Foreign Exchange (“SAFE”) to manage overseas financing for all enterprises other than governmental financing platforms and real estate enterprises, including all financial institutions except for 27 that the PBOC will manage itself.

The new regime sets a debt ceiling by reference to (i) the enterprise’s assets value, as stated in the latest audited balance sheet, and (ii) the existing foreign debt, both adjusted by multiplier coefficients established by the authorities at a macroeconomic level.

Currently, the coefficients applicable to enterprises other than banks and financial institutions are 1 for the net asset value, and 1.5 or 2 for the existing foreign debt, depending on whether it is long or short term. However, coefficients are subject to change based on the development of the domestic economy.

Thus, in general, an enterprise can incur additional foreign debt, provided the total foreign debt adjusted by multiplier coefficients does not exceed the net asset value adjusted by multiplier coefficients:

Total balance of short term foreign loans, if any x 1.5

+ Total balance of mid-to-long term foreign loans, if any x 1.0

+ Total balance of foreign currency foreign loans, if any x 0.5

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< or = net asset value x 1

This formula may vary in different circumstances (e.g., for financial institutions, the ceiling will equal 80% of the net asset value of the latest audited balance sheet). Balances in foreign exchange must be converted into RMB by applying the exchange rate at the date of withdrawal.

From a procedural perspective, foreign loans under the new system do not require prior authorization from SAFE. Instead, it is enough to notify any withdrawal at least three days in advance. This obligation is supplemented by the enterprise presenting annu al financial statements for SAFE to monitor.

This new system is compulsory for domestic enterprises, while foreign-invested enterprises can choose to either apply the new system or continue to be governed by the old foreign debt quota system, which sets the foreign debt quota in the gap between total investment and registered capital, proportional to the effectively paid-in capital percentage. In the old system, long-term foreign debt permanently occupies the foreign debt quota, with short-term foreign debt reinstating the foreign debt quota once fully repaid. Once a foreign invested enterprise opts for the new system, there is no possibility of returning to the previous foreign quota system.

We expect regulatory development and changes in the system’s application to foreign- invested enterprises.

Date of issue: April 29, 2016. Effective date: May 3, 2016