On 5 January 2018, China Banking Regulatory Commission ("CBRC") issued the Administration Measures on the Entrustment Loans of Commercial Banks (《商业银行委托贷款管理办法》, Yin Jian Fa [2018] No. 2, the "Measures"), which came into effect on the same date. The Measures streamlined and tightened the regulations over entrustment lending in China.

An entrustment loan refers to a loan between corporates (and/or individuals) as lender and borrower, and a Chinese commercial bank acts as the intermediate agent (the “Agent Bank”) of the borrower and lender for the payment and administration of the loan. The Agent Bank does not provide funding for the loan or assume any risk in relation to the loan. The Measures apply to all entrustment loans in China, other than those "entrusted fund flows" under the cash pooling products offered by Chinese banks.

We set out below the highlights of the Measures for your reference:

Restrictions on the source of funds

Asset management companies and other non-bank institutions licensed to engage in lending business are not permitted to extend entrustment loans. Further, the funds for entrustment loans cannot be sourced from, among others:

(i) funds owned by third parties but under the lender’s custody;

(ii) proceeds from bank loans;

(iii) funds derived from debts; or

(iv) funds of which the source cannot be identified.

The Agent Bank is required to conduct due diligence in respect of the source of funds of the lender for the entrustment loan.

Restrictions on the use of entrustment loans

Entrustment loans shall not be used for the following purposes:

(i) production, business or investment in industry sectors which are prohibited by the State;

(ii) financial investment (such as bonds, futures, derivatives and asset management products, etc.);

(iii) registered capital; or

(iv) equity investment.

The restrictions above indicate that entrustment loans shall only be used by borrowers for the purpose of daily business operation.