FIE Financing and the New Foreign Debt Measures

Once implemented,¹ the Foreign Debt Procedures will tighten supervision, by the State Administration of Foreign Exchange (SAFE), of foreign financing of Foreign-invested Enterprises (FIEs), will make it necessary for foreign lenders to obtain proof that their loans to FIEs and other PRC borrowers have been registered, and will strengthen classification and supervision of foreign funds borrowing, security, usage and repayment by all PRC borrowers. Only trade credit is likely to escape the general tightening.

Registration Now a Condition of Foreign Debt Validity

Though here we will focus on FIE financing and trade credit that is provided or arranged by foreign investors, the most dramatic new provision of the Foreign Debt Procedures will impact mainly foreign lenders to unaffiliated PRC borrowers. This provision states that foreign debt agreements will not be effective until they have been registered with SAFE.² It has long been advisable for foreign lenders to verify SAFE registration of FIE borrowers' foreign debt agreements, and SAFE approval and registration of domestically owned PRC borrowers' foreign debt agreements, but registration was not a condition of an agreement's effectiveness. This new condition is likely to increase the risks, and precautionary costs, faced by foreign lenders to PRC borrowers.