With the Chinese government tightening its control over overseas direct investments (“ODI”) and strictly regulating capital outflows from mainland China, many enterprises have reverted to so-called “domestic security for overseas debt” structures (Chinese: nei bao wai dai, “NBWD”) to finance acquisitions by their overseas subsidiaries. These commonly used financing arrangements are now subject to tighter scrutiny.

Typically, an enterprise in mainland China (“Domestic Enterprise”) provides security (e.g. a deposit or a share pledge) to a PRC domestic bank (“PRC Bank”). The PRC Bank then issues a corresponding bank guarantee or standby letter of credit to its overseas affiliate or a correspondent bank (“Overseas Bank”). The Overseas Bank will then, on the strength of such security, grant a loan to an overseas subsidiary of the Domestic Enterprise (“Overseas Subsidiary”) which the Overseas Subsidiary may use to finance, for example, an investment outside mainland China.

On 24 November 2017, the General Office of the State Administration of Foreign Exchange (“SAFE”) issued the Circular on Improving Foreign Exchange Administration of Domestic Security for Overseas Debt Provided by Banks (Hui Zong Fa [2017] No.108) (“Circular 108”).


Authenticity and Compliance Review by Bank

Circular 108 requires a Chinese bank to verify the following when handling NBWD business:

  • Eligibility of Overseas Debtor: If the overseas debtor is directly or indirectly controlled by a Chinese entity or individual, the bank must verify that the relevant Chinese ODI regulations have been observed with respect to, e.g., the establishment or acquisition of the overseas debtor by the Chinese entity or individual.
  • Use of Funds and Transaction Background: Where the funds are used to directly or indirectly acquire shares or debts of other overseas entities, the bank must verify that such investment complies with relevant Chinese ODI policies and regulations.
  • Primary Source of Funds for Repayment and Likelihood of Performance of Security: A security provider and a debtor shall not enter into a cross-border security contract if they know or ought to know that the performance of the security is certain to be trigged. The bank may, taking into account the following factors and based on reasonable commercial principles, judge whether there is any obvious intention to realize the security rather than performing the underlying debt:
    • liquidity, expected source of funds for repayment, business operation and debt ratio of the debtor;
    • whether the usage of the loan as stated by the debtor is in line with the financing terms under the loan contract;
    • whether the parties to the security have the intention of repaying the loan prematurely by way of realization of the security; and
    • whether any party to the security has committed any “malicious performance of security” (i.e. has provided a security although it knew or ought to have known that the security was certain to be realized) or has defaulted on repayment of any debt.
  • For Counter-Security:
    • The source of the collateral shall comply with the regulations of the relevant industrial regulators;
    • The source of the counter-security funds shall be “reasonable and legitimate”; and
    • The total counter-security amount provided by a single counter-security provider for business of a similar kind shall be commensurate with its financial status.

Enforcement of NBWD

The currency for performance of NBWD shall be identical with that under the security contract.

For NBWD businesses handled by banks after 26 January 2017, in case of default of the principal debt, the bank (as security provider) shall perform the security first with its own funds, rather than using the funds provided by the counter-security provider.

In the event of realization of the security provided under a NBWD arrangement, upon the bank (as security provider) making outbound payments to the overseas creditor and taking recourse against the domestic counter-security provider (“Counter-Security Recovery”), there will arise a claim of the domestic counter-security provider against the overseas debtor by way of subrogation (“Subrogation Claim”). The amount of the Subrogation Claim shall occupy the outbound lending quota of the domestic counter-security provider (which is capped at 30% of owners’ equity of the domestic counter-security provider as shown in its audited financial statements for the previous year), and the domestic counter-security provider is required to register the Subrogation Claim with local SAFE within 15 working days following the Counter-Security Recovery.


In a nutshell, upon implementation of SAFE Circular 108, SAFE and relevant banks will strengthen administration of NBWD. This is likely to result in longer processing times at the banks when they decide whether or not to support an investor’s overseas financing arrangement. Parties to Chinese overseas transactions should factor this into their transaction planning. A thorough and early check of the feasibility of the intended financing arrangement is recommended.