China's foreign exchange authority has significantly eased restrictions on cross-border security and guarantees, a much-anticipated and game-changing development that opens the door to many previously prohibited or otherwise impractical financing structures

Overview

On 19 May 2014, the State Administration of Foreign Exchange of the PRC ("SAFE") formally issued the Foreign Exchange Administration Rules on Cross-border Security and its corresponding implementation guidelines (Hui Fa [2014] No. 29) (collectively, the "New Regulations"). Among the most exciting changes is that the New Regulations, which come into effect on 1 June 2014, will allow domestic onshore entities and individuals in China to grant security and provide guarantees to offshore creditors ("Outbound Security") without the need for SAFE approval.1 Prior to the New Regulations, the provision of Outbound Security was subject to SAFE's review of whether a set of onerous requirements had been satisfied, including those relating to the principal debtor's profitability and the security provider's net assets position, total foreign currency revenues, and affiliation with the principal debtor. In many cases, these requirements effectively rendered Outbound Security arrangements prohibited or at least impractical.

As a whole, the New Regulations have fundamentally changed SAFE's approach to regulating the provision (and acceptance) of cross-border security and guarantees by PRC entities or involving assets in the PRC, not just in the case of Outbound Security but also where the security provider or guarantor is an offshore entity. Whereas in the past, SAFE's cross-border security regime revolved around substantive review and approval requirements, the New Regulations take on a procedural, registration-based approach. Furthermore, registration with SAFE is itself not a condition to the validity of the guarantee or security interest.

The New Regulations classify cross-border security and guarantees into three types:

  • An onshore entity or individual providing security or guarantees to an offshore creditor to secure the obligations of an offshore principal debtor ("Onshore Security Offshore Debt" or "Nei Bao Wai Dai (内保外贷)");2
  • An offshore entity or individual providing security or guarantees to an onshore financial institution to secure the obligations of an onshore borrower (the "Offshore Security Onshore Debt" or "Wai Bao Nei Dai (外保内贷)");3 and
  • Other types of cross-border security and guarantees not included above.

Security or guarantees provided in Onshore Security Offshore Debt or Offshore Security Onshore Debt structures must be registered with SAFE (though, as mentioned above, registration is merely a procedural matter that is not a condition to the validity of the security interest or guarantee itself). All other types of cross-border security and guarantees, unless SAFE specifically requires otherwise, generally do not need to be registered or filed with SAFE.