Several Issues regarding Guarantee Companies in China

CGCs for small and medium size enterprises (CGCSME) is one type of CGCs receiving tax exemption and other favorable policies and provide beneficial guarantees to small and medium size enterprises in return. This kind of CGCs is subject to government supervision on all aspects of its operation and does not take profit making as the main purpose of business. CGCSME's main business is to provide guarantee services to small and medium size enterprises so as to enable the latter to obtain loans from a Chinese bank, ultimately implementing the government policy of “supporting the development of small and medium size enterprises”. At the very beginning, the rules and regulations refer to those established mainly by government authority but now the ownership of CGCSMEs barely rate a mention. Currently CGCSME is the only type of CGCs for which some regulations, rules and policies are actually published.

The concept, Commercial CGCs, first appeared in rules and policies regarding CGCSME in 1999. There is no specific definition regarding commercial CGCs under Chinese law. Based on common understanding, a commercial CGC refers to a CGC taking profit making as its primary business purpose, and operating in accordance with marketing practice. Most commercial CGCs include both individual business and enterprises business as part of their business scope. To the best of our knowledge, the current existing foreign investment CGCs are generally commercial CGCs.

Some regulations also mention a type of “CGCs for mutual guarantee purposes”. There is no legal definition under Chinese law for such. As its name indicates, these CGCs are invested and established by enterprises and provide guarantees on behalf of its investors to securing loans for financing.

The concept of CGCs for home loan purposes first appeared around eight years ago. It referred to CGCs providing guarantee services to individuals for home purchase loans. In May 2004 the State Council repealed the approval requirement for its establishment, after which such a concept has been seldom practiced.

Administration Authority of CGC Industry

CGCs were originally deemed as financial institutions and were therefore subject to the supervision of the People's Bank of China. However, in 1999 China's central bank, the People's Bank of China (PBOC) denied the CGCs such a status. And in 2006, an official from the China Banking Regulatory Commission (CBRC) declared in public that the Commission has no intention to include CGCs under its supervision.

To the best of our knowledge, at present there are no laws or regulations specifically indicated as an industrial administration authority of CGCs. In practice, all activities and administrations regarding CGCs are carried out by each level of government on the basis of their relevant administrative functions.

The National Development and Reform Commission (NDRC) has the function to encourage the development of small and medium sized enterprises. According to a decision of the State Council in 2004, the NDRC is the examination and approval authority for CGCSMEs of large scale and/or those operating in more than one province. At a local level, in 1999 the former State Economic and Trading Commission (SETC) requested that municipal or provincial level governments to establish a Supervision Committee on Credit Guarantees for Small and Medium Size Enterprises (SCCG), a joint working group composed of local branch of SETC, PBOC, local SAIC and other authorities of the same level to together decide the affairs relating to CGCSMEs.

With respect to other types of CGCs, no industrial supervision authority has been appointed.

Legislation regarding CGCs

1999-2003 is a period during which the CGCs rapidly developed in China. During this time and for a period after that, a number of measures relating to the establishment and supervision of CGCSMEs had been issued by the NDRC, the State General Tax Administration Bureau, the Ministry of Finance, and SETC on the basis of their administration power. Government authorities, enterprises and other entities had been advocating the preparation and promulgation of laws to regulate CGCs. However, up to now there is not a law or a regulation which specifically governs the establishment, operation and supervision of CGCs other than those listed as CGCSMEs. (Although in several of the above measures, it is mentioned that the practice of commercial CGCs may refer to these measures, there is not a clear provision clearly provide the rules relating to commercial CGCs.)

Recently, it has been rumored that the Ministry of Commerce (MOFCOM) stopped all approval relating to foreign investment CGCs on both local and central level and have begun to draft a regulation. Hopefully a rule specifically dealing with foreign invested CGCs will be formulated and published by MOFCOM and relevant authorities in the future.