Key Points:

  • New circular lowers the qualification requirements for the secured party, as well as requirements for security providers
  • Procedures for performing the security obligation are specified

To facilitate overseas investment by China-based entities, the State Administration of Foreign Exchange (SAFE) promulgated the Circular on Issues Concerning Administration of the Provision of Security to Foreign Entities by Domestic Entities (the Circular).

The Circular lowers the qualification requirements for the secured party. According to the Circular, the secured party should be a domestic or foreign enterprise in which the enterprise (except for banks) acting as the security provider directly or indirectly owns equity. With the release of the Circular, whole ownership of the overseas secured enterprise is no longer required. In addition, a loss-generating enterprise may not apply for the security under the old provisions. However, according to the Circular, as long as the value of the net assets of the secured party is positive and the secured party has generated net profits in any one of the latest three years, the provision of security may be approved.

The Circular loosens requirements for security providers, as well. According to the previous regulations, the balance amount of security provided by an enterprise (except for financial institutions) may not exceed 50 percent of its net assets or its foreign exchange income from the previous year. In addition, there were various requirements applicable to different types of enterprises (except for financial institutions) providing security regarding the ratio between net assets and total assets. With the promulgation of the Circular, the foreign exchange income requirement has been eliminated, and the ratio between the security provider’s net assets and total assets is uniformly set at 15 percent or greater (not applicable to financial institutions).

In addition, the Circular specifies the procedures for performing the security obligation. A bank may perform the security obligation directly without the SAFE’s approval. For a nonbank financial institution or an enterprise, the SAFE’s approval is needed before performing the security obligation.