Key Points

  • Three Guarantee Types Under New Provisions
  • Registration Instead of Approval for Execution and Performance
  • Fewer Restrictions on Quota Limits and Qualification Requirements for Guarantors
  • Restrictions on the Use Purpose of the Money Obtained from Outbound Guarantees

Background

On May 12, 2014, the State Administration of Foreign Exchange (“SAFE”) issued the Provisions on Foreign Exchange Control for Cross- border Guarantees and its implemented guidelines, the Operational Guidelines for the Administration of Cross-border Foreign Exchange Guarantee (collectively, the “New Provisions”), which came into  effect on June 1, 2014. The New Provisions have superseded a series of regulations previously issued by SAFE and made significant changes to ease the requirements for cross-border guarantees.

Highlights of Cross-Border Guarantees Provisions

The New Provisions provide three kinds of cross-border guarantees:

  1. Nei Bao Wai Dai, which refers to the guarantee provided by an onshore guarantor (including banks, non-bank entities and PRC individual) for a debt owing by an offshore debtor to an offshore creditor (the “Outbound Guarantee”). The New Provisions allow multiple guarantors under an Outbound Guarantee.
  2. Wai Bao Nei Dai, which refers to the guarantee provided by an offshore guarantor for a debt (excluding entrustment loans) owing by an onshore debtor to an onshore creditor (the “Inbound Guarantee”), under which the onshore debtor must be a non- financial institution and the onshore creditor must be a financial institution.
  3. Other types of cross-border guarantees other than above (the “Other Guarantees”).

Registration Instead of Approval for Execution and Performance

Under the previous cross-border guarantee regime, a PRC entity  was unable to grant any guarantee for an offshore loan without pre-approval issued by SAFE. Based on the New Provisions, the execution and performance of the guarantee agreement will not be subject to SAFE’s approval. Currently, failure to register with SAFE will not invalidate the guarantee as a pre-condition.

Specifically, for the Outbound Guarantee, the execution of a guarantee agreement (and any subsequent change to its major terms as well as its termination) shall be registered with SAFE. In the case that the guarantee provider is a bank, the bank shall register the guarantee through an online platform with SAFE, while a non-bank guarantee provider shall register with local SAFE within 15 working days after the date of such agreement. Where the debtor fails to repay the loan, the domestic guarantor may perform the guarantee  on its own (if the guarantor as a bank) or directly with the bank (if the guarantor as non-bank organization).

For the Inbound Guarantees, the domestic creditor shall register the guarantee through an online platform with SAFE. In the case that the debtor fails to repay the loan, the onshore creditor may collect the guarantees directly with the offshore guarantor, and the onshore debtor shall register the debt as a short term foreign debt with local SAFE within 15 working days after the guarantee performance.

For Other Guarantees, there is no registration requirement  unless otherwise stipulated for execution or performance of such guarantees.

Fewer Restrictions on Quota Limits and Qualification Requirements for Guarantors

Under the previous cross-border guarantee regime, the total outstanding amount of the foreign guarantee, domestic foreign exchange guarantee and foreign debts of a financial institution incorporated in China shall not exceed 20 times the amount of its foreign exchange funds. As to a non-financial institution, the foreign guarantee balance shall not exceed 50% of its net assets, nor its foreign exchange revenue in the preceding year. Such requirements have been abolished in the New Provisions.

The New Provisions do not require the ratio of the net assets to overall assets of a guarantor as stipulated before, and the domestic guarantors are now allowed to provide guarantees for non-affiliated enterprises under Outbound Guarantees. The domestic guarantor, however, shall hold the debtor’s shares of capital for Outbound Guarantees if the guarantees are the repayment obligations for the overseas loans issued by the debtor. Under Inbound Guarantees,  the onshore debtor shall ensure that the total outstanding principal amount of all its liabilities from the performance of the guarantee will not exceed its audited net assets in its audit report of the previous year.

Restrictions on the Use Purpose of the Money Obtained from Outbound Guarantees

Offshore debtors under the Outbound Guarantees can only use the gained money for normal operation and are forbidden from any speculative transactions. Without approval from SAFE, the offshore debtor is not allowed to remit any money supported by the Outbound Guarantee back into China, including i) any direct or indirect equity investment in or intercompany loan to a Chinese entity; ii) acquisition of any offshore entity which has more than 50% assets located in China; iii) repayment of any debts which were originally financed for equity investment in or intercompany loan to a Chinese entity; and iv) pre-payment under a trade transaction of goods or services to a China entity, which is made more than one year ahead of the provision of the goods or services and the amount of which is more than US$1 million and 30% of the total contract price.

Conclusion

The New Provisions aim to relax control over cross-border guarantee to ensure it is more flexible and convenient, making significant efforts to be in line with the policy of liberalizing Rinminbi, and helping enterprises to cost-effectively use funds from onshore or offshore guarantees. The New Provisions and its intended results are likely to be welcomed by the market.