How to Borrow from Chinese Entities

The offshore banking departments of Chinese banks are able to accept deposits from offshore clients and lend such money to offshore clients. Such lending can be basically deemed as lending occurring outside China although the bank is located in the PRC.

Due to historical reasons, since 2002, only the Shenzhen-based China Merchant Bank and Shenzhen Development Bank and the Shanghai-based Bank of Communications and Shanghai Pudong Development Bank have been approved by CBRC to conduct offshore banking business. The volume of their offshore lending is small when compared to that of cross-border lending.

Lending by foreign banks

Foreign-investment banks in China, including wholly foreign-invested banks, Sino-foreign joint venture banks and Chinese branches of foreign banks, can lend money to non-PRC entities from their bases in China. However, normally foreign-investment banks in China do not focus on lending out from China as most of these banks have offshore affiliates which conduct their own local lending business.

Lending within multinational conglomerates

According to the Notice on Certain Issues relating to the Administration of Operation of Foreign Exchange Funds within Multinational Corporation issued by State Administration of Foreign Exchange (SAFE) on October 18 2004, lending is permitted between affiliates of the same multinational company group while its global or regional investment management power is controlled by a member company located in the PRC. With the approval from SAFE, the offshore lending from the PRC member company can be made:

(a) through a financial company in the same group established according to the Rules of Administration of Financial Company of Enterprise Group, promulgated by CBRC on July 27 2004 and amended on December 28 2006;

(b) in the form of an entrusted loan extended by a commercial bank pursuant to the General Principles of Lending promulgated by PBOC on June 28 1996; or

(c) directly from the domestic member company to the offshore member borrower, if the requirements set forth in the above notice are fulfilled.

Lending from Chinese parents

This lending process is still in a pilot stage. The pilot area is Ningbo City of Zhejiang Province. According to the approval from SAFE on July 15 2007, the Ningbo Branch of SAFE issued the Rules for the Pilot Reform on Offshore Lending in Ningbo City. Pursuant to this rule, a company incorporated in Ningbo can lend money directly to its offshore subsidiary within a maximum amount with the approval of Ningbo Branch of SAFE if (i) it has established an offshore subsidiary; (ii) the approved registered capital of such subsidiary has been remitted outside; and (iii) such onshore parent has not violated the foreign exchange regulations in the past two years. The funds to be lent can be the parent's own foreign exchange funds, or the funds converted from the parent's Renminbi funds, or can even be the foreign exchange loan borrowed by the parent from a domestic bank (if the bank agrees to the on-lending).

Obviously, the current lending scheme is featured by differentiation of regions of lender and entities involving lending and there are no nationwide generally applicable regulations and practices. This is one of the reasons why many offshore subsidiaries of Chinese companies (especially private companies) without local credit records or good standing in the foreign country have faced difficulties in obtaining subsequent financing after the initial capital is injected by their Chinese parents.

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