On 19 May 2014, the State Administration of Foreign Exchange (“SAFE”) of the People's Republic of China ("PRC") issued the 'Provisions on the Administration of Foreign Exchange for Cross-Border Security' and its implementation guidelines (collectively, the "Provisions"). The Provisions came into force from 1 June 2014 and superseded a series of regulations previously issued by SAFE in respect of cross-border securities. The Provisions are intended to extend the reform of PRC's foreign exchange administration system, simplify the administrative examination and approval procedures, and regulate the use of receipts and payments under cross-border guarantees.
The Provisions divide all cross-border securities into three categories on the basis of the places of registrations of the parties to the securities:
- Nei Bao Wai Dai (内保外贷) or outbound security, means a security provided by an onshore security provider for a debt owned by an offshore debtor to an offshore creditor;
- Wai Bao Nei Dai (外保内贷) or inbound security, means a security provided by an offshore security provider for a debt owned by an onshore debtor to an onshore creditor; and
- other types of security with a cross-border element.
The key changes to the current regime under the Provisions are summarized as follows:
- The approval, registration and/or filing requirements of SAFE in relation to cross-border security arrangements as detailed in the Provisions are not pre-conditions to the cross-border security arrangements coming into effect. In other words, registration of cross-border security with SAFE is no longer a "perfection" requirement and any approval, registration or filing will not impact the validity of the security.
Note, the Provisions now only require post-registration of cross-border security with the local SAFE authority under Nei Bao Wai Dai and Wai Bao Nei Dai structures. No SAFE registration is required for other types of cross-border security unless otherwise expressly stated by SAFE.
- In relation to outbound security, the Provisions remove the requirement for prior case-by-case SAFE approval or SAFE quotas and financial criteria that onshore security providers and offshore debtors were previously required to satisfy. There is also no mandatory requirement for any shareholding relationship between the onshore security provider and the offshore debtor. PRC nationals are now expressly permitted to provide outbound security on an individual basis and therefore, obtaining a personal guarantee from a PRC national will likely be more straightforward under the new regime, whether or not a corporate guarantor is also involved.
- The distinction between the administrative schemes concerning security for finance purposes and security for non-finance purposes has been eliminated.
- Enforcement of any properly registered cross-border security under outbound security or inbound security structure no longer requires prior SAFE verification.
Impact on shipping market
- Prior to the introduction of the Provisions, a typical ship financing funded by offshore lenders to offshore subsidiaries of PRC-based parent companies, is usually backed by a guarantee (which is subject to having sufficient SAFE quota or SAFE's case-by-case approval) or, where such quota and approval are not available, some form of 'keep-well' arrangement provided by the onshore parent companies.
This existing structure has a few downsides, including, for example, the difficulty in obtaining a SAFE quota or SAFE's approval for the onshore parent's guarantee. Under the new regime, the offshore lenders will benefit directly from security provided by the onshore parent. Such cross-border security under a Nei Bao Wai Dai structure is no longer subject to quota or SAFE approval. The only remaining formalities are the registration of the cross-border security with the local SAFE authority after signing and with the overseas credit registration with the local SAFE authority after enforcement.
The stronger protection of a guarantee or security afforded by an onshore entity should give offshore creditors and investors greater confidence, which may enable the offshore entity to obtain funding at a lower cost.
- In relation to refund guarantees issued by PRC banks to foreign newbuild buyers, PRC banks are still obliged each month to summarise all foreign currency refund guarantees and to report them to SAFE via a pre-established reporting system notwithstanding that the quota regime for PRC banks has been abolished.
The promulgation of the Provisions represents a significant step towards liberalisation of security and guarantees provided by PRC companies or individuals. We believe the Provisions will be warmly welcomed by market participants.