On May 19, 2014, the State Administration of Foreign Exchange (“SAFE”) released Notice on the Promulgation of Foreign Exchange Administration Rules on Cross-border Guarantee (国家外汇管理局关于发布《跨境担保外汇管理规定》的通知) (“Circular 29”) with a view to promoting cross-border guarantee activities and convertibility under capital accounts. Circular 29 took effect on June 1, 2014 and twelve other SAFE regulations regarding cross-border guarantee will be abrogated.
Cross-border Guarantee Subject to Circular 29
Generally speaking, in a guarantee agreement, a guarantor promises to the lender and undertakes that if a borrower fails to perform its obligations as agreed upon in a loan agreement, then the guarantor shall fulfill such obligations (also known as “performance of guarantee”). The basic financing structures of a guarantee can be shown in the following chart.
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Under Circular 29, cross-border guarantees fall into three categories: (a) domestic guarantee to foreign loans (内保外贷), which refers to the circumstance where guarantor has a domestic domicile while each of lender and borrower has a foreign domicile ; (b) foreign guarantee to domestic loans (外保内贷), which refers to the circumstance where guarantor has a foreign domicile while the lender and borrower have domestic domiciles; and (c) other forms of cross-border guarantee, which refer to, without limitation, the following four circumstances: i) domestic guarantor + domestic/foreign borrower + domestic/foreign lender, ii) foreign guarantor + domestic/foreign borrower + domestic/foreign lender, iii) domestic guarantor + domestic borrower + domestic lender + foreign registration of guarantee, iv) foreign guarantor + foreign borrower + foreign lender + domestic registration of guarantee. Current SAFE rules have a much narrower scope and only cover the provision of guarantee to foreign parties by domestic institutions and foreign guarantee to domestic loans.
Changes to Domestic Guarantee to Foreign Loans
- Circular 29 cancels the amount limit and pre-approval requirement of domestic guarantee to foreign loans;
- Except for a general restriction that a borrower can only use the loans within the scope of its regular business, Circular 29 cancels special restrictions on net asset ratio and affiliated relations of guarantor and borrower;
- Registration rather than pre-approval is the main regulative measure under Circular 29;
- The approval requirements for the performance of guarantee are cancelled under Circular 29 and the performance of guarantee can be processed directly by the bank;
- Registration of foreign debt, if any, with SAFE is required after the performance of guarantee.
Changes to Foreign Guarantee to Domestic Loans
- Circular 29 provides that lenders must be domestic financial institutions and borrowers must be non-financial institutions. Additionally, the debt should be either regular loans in RMB and foreign currency or line of credit, but not entrusted loans;
- A centralized registration of lenders, i.e., domestic financial institutions, should be required;
- Lender is allowed to collect the debt on its own account in the event of performance of guarantee;
- Lender is responsible for registering its foreign debt, if any, with SAFE after the performance of guarantee. However, such foreign debt is not counted towards lender’s own quota for regular foreign debt.
Regulations of Other Forms of Cross-border Guarantee
Circular 29 provides that domestic institutions are allowed to sign other forms of guarantee agreements, which are neither foreign guarantee to domestic loan agreements nor domestic guarantee to foreign loan agreements, on their own account without registering with SAFE. However, relevant rules regarding foreign debt registration, direct investment and securities investment should still be followed as before.
Circular 29 clearly provides that the validity of cross-border guarantee agreements is independent from SAFE’s approval or registration requirements. With SAFE stepping back and relaxing its foreign exchange controls, cross-border borrowers and lenders should be less worried about regulatory delays effecting their financings. In particular, as domestic borrowers, Chinese enterprises will see more financing opportunities overseas, which will promote their merger and acquisition activities.