On May 12, 2014, China’s State Administration of Foreign Exchange (SAFE) issued a Notice of Issuance of Foreign Exchange Administrative Rules on Cross-Border Guarantees which took effect on June 1, 2014. Under the Notice, the scope of cross-border guarantees has been broadened with a view to covering all types of cross- border guarantee activities in practice, which are divided into three types
- a cross-border guarantee where the registered address of a guarantor is onshore, and the registered addresses of a debtor and creditor are both offshore (an “Outbound Guarantee”);
- a cross-border guarantee where the registered address of a guarantor is offshore, and the registered addresses of a debtor and creditor are both onshore (an “Inbound Guarantee”); and
- any other types of cross-border guarantees in addition to the aforesaid two types (“Other Cross-border Guarantees”).
As in previous SAFE rules on this area, provisions applicable to financial institutions (i.e. banks) and non- financial institutions (i.e. non-bank financial institutions and enterprises) are different. Under this newsletter, we focus on rules related to enterprises.
I. Reform on Outbound Guarantees
a. Pre-approval and Quota Evaluation:
The pre-approval and quota evaluation on an Outbound Guarantee are replaced by a post-registration mechanism. Previously, an Outbound Guarantee was required to be pre-approved on a case-by-case basis, and an onshore guarantor that have a large number of Outbound Guarantee businesses would be exempted from such case-by-case pre-approval but still required to apply for a guarantee quota from local SAFE. Further, onshore individuals are now able to act as onshore guarantors to provide Outbound Guarantees to offshore entities.
b. Execution of a Guarantee Contract:
Now an onshore guarantor can execute a guarantee contract at its own discretion without the need to submit such contract to the local SAFE for its approval.
c. Restrictions on Involved Parties:
Except for those general restrictions such as the restriction on the purpose of using the guarantee fund, other restrictions on onshore guarantors, asset ratio of offshore creditors and general shareholding requirements are either cancelled or eliminated. The shareholding requirement only exists when the guarantor’s obligation is to secure the repayment obligation of an offshore debtor engaging in the issuance of bonds. Under such circumstance, shares of such offshore debtor shall be directly or indirectly held by the onshore guarantor.
d. Guarantee Enforcement:
The pre-approval on the guarantee enforcement has been removed. An onshore guarantor may directly go to a local bank to purchase foreign currency by presenting the guarantee registration document for paying the offshore creditor. If a guarantee enforcement occurs, the onshore guarantor will become an onshore creditor as a result of such enforcement who should apply with the local SAFE for the registration of its credit owed by the offshore debtor.
II. Reform on Inbound Guarantees
a. Qualification of Parties:
While onshore creditors still must be financial institutions, the scope of onshore debtors are extended from onshore foreign-invested enterprises and certain qualified domestic enterprises to all onshore non- financial institutions. In addition, Inbound Guarantees provided by offshore individuals are also accepted now.
b. Execution of a Guarantee Contract:
Similarly as the case under Outbound Guarantees, an onshore creditor can execute a guarantee contract at its own discretion without the need to submit such contract to the local SAFE for its approval. An onshore creditor (financial institution) is responsible for submitting information of such Inbound Guarantee to the online system of local SAFE for filing.
c. Guarantee Enforcement:
An onshore creditor is now able to directly receive payments from an offshore guarantor in case of a guarantee enforcement. If a guarantee enforcement occurs, the offshore guarantor will become an offshore creditor as a result of such enforcement, hence, the onshore debtor should apply with the local SAFE for the registration of its debt owed to the offshore guarantor.
III. Rules on Other Cross-border Guarantees
Under the Notice, Other Cross-border Guarantees include the following circumstances:
- Where an guarantor is onshore, and either a debtor or a creditor is onshore and the other is offshore;
- Where an guarantor is offshore, and either a debtor or a creditor is onshore and the other is offshore;
- All parties (i.e. a guarantor, debtor and creditor) are onshore, but the registration address of the guaranteed property is offshore; and
- All parties (i.e. a guarantor, debtor and creditor) are offshore, but the registration address of the guaranteed property is onshore;
For the above Other Cross-border Guarantees, onshore entities can enter into a guarantee contract at its own discretion without the need to submit such contract to local SAFE for its approval. Except as otherwise provided by the SAFE, Other Cross-border Guarantees are not required to be registered or filed with local SAFE.
With SAFE further relaxing its foreign exchange control on cross-border guarantees, we believe that many onshore companies, which were unable to meet the requirements under the old regime, are able to arrange or structure their cross-border funding with more flexibility and certainty.