On August 16, 2011, the State Administration of Foreign Exchange of the People’s Republic of China (“SAFE”) issued the Circular on Relevant Issues Concerning the Ratification of the Quotas Balance for Granting Foreign Security by Domestic Banks in 2011 (the “ Circular”).
The Circular adjusts and reduces the quota scale (i.e. total secured amount) set in 2001 for granting security or guarantee by domestic banks in favour of offshore entities ("Foreign Security") to the amount of US$76.376 billion. The basis for determining the quota for each individual Chinese-funded bank, or locally incorporated foreign-fund bank, shall be its Tier 1 capital in both domestic and foreign currencies at the end of last year. The basis for determining the quota for each individual foreign bank shall be its working capital in both domestic and foreign currencies or net foreign currency assets at the end of the last year. In the event that the total outstanding secured amount of the Foreign Security provided by a bank exceeds its 2011 quota, the bank shall reduce its Foreign Security to the quota within three months upon SAFE’s determination of the quota, prior to which no Foreign Security can be provided by such bank.
The Circular also provides for several key rules regarding the Foreign Security:
- Firstly, Foreign Security granted to secure the issuance of any offshore bond shall be subject to a case-by-case approval of SAFE.
- Secondly, Foreign Security granted to secure offshore RMB debt shall be subject to the same quota management as those securing offshore debt in foreign currencies.
Lastly, the Circular has reinforced the prohibition by earlier SAFE regulations that loan proceeds (the “Proceeds”) which are secured by the Foreign Security must not be repatriated back to China directly or indirectly by means of investment via equity/debt or other means. The following repatriation activities have been identified in the Circular as “prohibited” and are described as follows:
- Proceeds are used for refinancing a loan where those proceeds are repatriated back to China;
- Proceeds are directly or indirectly used for purchasing the equity of any offshore company, whose major assets are located in China; and
- Other repatriation as considered by SAFE to be wrongful repatriation.
For the full text of the Circular, please refer to the following Chinese language link: http://www.safe.gov.cn/model_safe/laws/law_detail.jsp?id=4&ID=8 0402000000000000,51