New Lending Rules Expected from the CBRC

Although recent years have seen a growing sentiment from PRC government authorities that PRC law should be the governing law for transactions between a foreign bank's onshore branch and a PRC borrower (including a foreign-invested enterprise), most market practitioners still believe that parties can freely choose foreign law as the governing law for a loan transaction between an onshore branch and a PRC borrower, given that the onshore branch would be construed as an offshore legal person's branch office and such loan transactions would be considered as "foreign-concerned". However, given the inconvertibility of the renminbi, almost all foreign banks conducting RMB business have chosen PRC law as the governing law. Also there has been a trend that more and more onshore branch offices of foreign financial institutions would rather choose PRC law as the governing law for foreign exchange transactions, as they would tend to enforce and seek protection in the local legal environment. The Rules suggest that PRC law shall be the governing law for loan agreements, and that may change or at least influence the attitude of the court's decision in this respect.

The Rules for the first time indicate that the security available for financiers shall be that set out in the PRC Security Law. This would greatly reduce the flexibility in choosing available security forms for onshore financiers. Apparently, foreign banks' onshore branches may choose a foreign security provider and the security is not necessarily limited to the three forms of security available in the PRC law context, i.e., mortgage (di ya), pledge (zhi ya) and guarantee (bao zheng). They may even consider using a security governed by foreign law to achieve further credit enhancement in addition to the credit profile built on a PRC law basis.

In the administrative practices of the State Administration of Foreign Exchange (SAFE) for security provided by an onshore company to a foreign financier (either onshore or offshore), if the parties choose a security form that is not available under PRC law, for example, assignment by way of security, SAFE may not like or be ready to register the security. If the Rules still restrict the security forms in this way once they are effective, many similar issues to those with the SAFE registration can be anticipated.

Market Practice and Commercial Issues vs. Compulsory Legal Requirements

Certain provisos or requirements in the Rules seem contradictory to market practices. For example, a bank is required to inform its loan applicant within 30 days whether the application is acceptable to the bank. Apart from the impracticability of such a 30-day period requirement, this would impose a strict obligation on the bank in this respect. Another point in the Rules is that the lender shall assume relevant liability to the borrower and any innocent third party, if it fails to make loan advances as provided under the loan contract. Market practice has been that the lender shall assume liability for its default although the loan contracts would not have provisions against the lender. Further, in the syndicated loans section of the Rules, the arranger shall advance the loans and make information disclosure to the participating lenders. Market practice has been that such information disclosure would be a commercial issue and, if information disclosure is required, the facility agent for the loans shall run such a process. In addition, an arranger is different from a lender.

A final point is that in a loan transfer or novation, the transferor shall disclose information to the transferee concerning the transfer price and risk profile of the transferred or novated loans. This differs markedly from current market practices.

Notification in a Loan Transfer

An interesting issue in the Rules is that in a loan transfer to be made by the lender, notification shall be made by the lender to the borrower within 30 days after the transfer, either in written form or via public announcement. The 30-day period and the notification by public announcement may be in contradiction with current contract law. However, this may reflect some ideas recently developed by the regulators, particularly in the area of non-performing loans.

21/F, South Tower

Shanghai Stock Exchange Building

528 Pudong Road South

Shanghai 200120 PRC

T: 8621 6881 8100 F: 8621 6881 6880

www.llinkslaw.com