Circular on Foreign Exchange Control Issues Relevant to Overseas Loans Extended by Enterprises in China

1. For the purposes of this Circular, the term “overseas loan” means the financing method whereby an enterprise in China (other than a financial institution; Lender) directly extends to a wholly-owned subsidiary or an enterprise in which it has an equity interest that it lawfully established overseas (Borrower) a loan in an amount, at an interest rate and for a term specified in a contract, and falling within its approved limit.

An overseas loan may also be extended in the form of an entrusted loan provided through a designated foreign exchange bank or through a finance company for an enterprise group with foreign exchange business qualifications that has been established with official approval.

2. The branch (or office) of the State Administration of Foreign Exchange (Foreign Exchange Control Authority) of the place where the Lender is located shall be responsible for oversight of matters relating to overseas loans such as limit approval, registration, dedicated accounts and the conversion and transfer of funds.

3. An enterprise in China that extends overseas loans shall abide by this Circular and other relevant foreign exchange control provisions, and subject itself to the administration, monitoring and inspection of the Foreign Exchange Control Authority.

4. Overseas loans shall be subject to balance control. An enterprise in China may remit funds overseas on one or more occasions within its overseas loan limit approved by the Foreign Exchange Control Authority.

An overseas loan limit shall be valid for two years from the date on which such limit is approved by the Foreign Exchange Control Authority. If use of the same will continue to be necessary after the expiration of the period, the Lender shall submit an application for extension to the Foreign Exchange Control Authority of the place where it is located one month before the expiration of the period.

5. The balance of overseas loans extended by a Lender may not exceed 30% of its shareholders' equity or the Chinese party's agreed upon investment amount for which the Borrower has duly carried out the relevant registration procedures. If the enterprise genuinely needs to exceed either of the aforementioned percentages, the Foreign Exchange Control Authority of the place where the Lender is located shall, after preliminary examination, forward the same to the State Administration of Foreign Exchange for review.

6. The Lender may extend an overseas loan to the Borrower using its own foreign exchange funds, foreign exchange funds purchased with renminbi or funds from a foreign currency fund pool approved by the Foreign Exchange Control Authority.

7. The Lender and the Borrower shall satisfy the following conditions:

(1) both the Lender and the Borrower shall have been registered and established in accordance with the law and their registered capital shall be fully paid in;

(2) both the Lender and Borrower shall have a record of continuous and good business operations, a sound financial system and sound internal control systems and, during the most recent three years, neither shall have been found to have committed a violation of foreign exchange control provisions;

(3) all of the foreign direct investment projects of the Lender over the years shall have been approved by the competent domestic department for outbound investment and foreign exchange registration procedures shall have been carried out therefor with the Foreign Exchange Control Authority; furthermore, the Lender shall have a rating of second grade or better in the most recent joint annual inspection of outbound investment (unless it has been established for less than one year); and

(4) if it has already extended an overseas loan since approval, the operation of the preceding overseas loan is normal without any default having arisen.

8. The Lender shall apply to the Foreign Exchange Control Authority to extend overseas loans on the strength of the following materials:

(1) a written application, that includes without limitation the basic particulars of the Lender, the basic particulars of the overseas enterprise, the amount of the overseas loan, the source of the funds and an undertaking in respect of the overseas loan (the basic contents of which shall include that the purpose of the overseas loan complies with laws and regulations of China and the country or region where the Borrower is located; that the principal of and interest on the loan will be recovered in a timely manner in accordance with the contract; that, in the event of a circumstance that has a material effect on the balance of payments of China, the overseas loan funds will be repatriated in a timely manner as required by the State Administration of Foreign Exchange, etc.);

(2) the loan agreement between the Lender and the Borrower, or the entrusted loan agreement among the Lender, the Borrower and the entrusted domestic designated foreign exchange bank or finance company, which shall specify the amount, interest rate, term, security method, method of repaying the principal and paying the interest, etc.;

(3) the Lender's financial audit report for the most recent period (if the Lender is a foreign-invested enterprise, it shall have passed the joint annual inspection for foreign-invested enterprises for two consecutive years, and provide its foreign exchange registration certificate for a foreign-invested enterprise and statement of its foreign exchange receipts and expenditures for the preceding year), business licence indicating that it has passed the annual inspection and an account of the use and repayment of overseas loans that have already been extended; if the Lender intends to use its own foreign exchange funds to extend the loan, it must provide the statement of its foreign exchange account as at the end of the month preceding the application date; or, if the Lender intends to purchase foreign exchange to extend the overseas loan, it must state the amount of foreign exchange it intends to purchase;

(4) the Borrower's foreign exchange registration certificate for overseas investment and financial audit report for the most recent period; and

(5) other additional materials that the Foreign Exchange Control Authority requests.

Within 20 workings days after reviewing and determining that the complete application materials received are in good order, the Foreign Exchange Control Authority of the place where the Lender is located shall render its decision on whether or not to grant approval. If it grants approval, it shall additionally determine the Lender's overseas loan limit.

9. Once the Lender's overseas loan limit is determined by the Foreign Exchange Control Authority, it may directly apply on the strength of its overseas loan approval document to a designated foreign exchange bank to open a dedicated overseas loan account. If the Lender extends more than one overseas loan, it may open a single dedicated overseas loan account and carry out the relevant fund transfers through such account.

If the Lender wishes to close its dedicated overseas loan account, it may apply to the designated foreign exchange bank for the closing thereof on the strength of its overseas loan approval document and the documentation attesting to the loan funds having been recovered.

All overseas loan funds must be remitted overseas through the dedicated overseas loan account and repaid principal and paid interest must be remitted back to the dedicated overseas loan account.

10. The scope of the receipts of a dedicated overseas loan account shall be foreign exchange funds transferred from the Lender's foreign exchange accounts for business capital and current account-related foreign exchange accounts; foreign exchange funds transferred from the Lender's foreign currency pool account approved by the Foreign Exchange Control Authority; foreign exchange funds purchased for the purpose of extending the overseas loan; the principal of and interest on the loan recovered from the overseas Borrower; and the security bond paid by the overseas loan guarantor.

The scope of expenditures shall be the overseas loan disbursed to the Borrower in accordance with the overseas loan contract; the recovered principal of and interest on the overseas loan transferred back to the corresponding foreign exchange accounts for business capital, current account-related foreign exchange accounts or foreign currency pool account that originally transferred the funds in; and the portion of foreign exchange converted corresponding to the portion originally purchased.

11. If the Lender is to use its own foreign exchange funds to extend the overseas loan, it may directly carry out the domestic transfer procedures with the designated foreign exchange bank on the strength of its overseas loan approval document; if the Borrower is to use foreign exchange funds purchased with renminbi to extend the overseas loan, it may directly carry out the foreign exchange purchase and domestic fund transfer procedures with the designated foreign exchange bank on the strength of its overseas loan approval document.

12. If loan funds are to be remitted overseas through the dedicated overseas loan account or funds such as repaid principal, paid interest and security bond are to be remitted into the dedicated overseas loan account from abroad, the Lender shall submit materials such as a written application, its overseas loan approval document and statement of its dedicated overseas loan account to the Foreign Exchange Control Authority of the place where it is located to apply for approval. Once the Foreign Exchange Control Authority has examined the same and determined that they are in order, it shall issue the Lender a capital account-related foreign exchange transaction approval document, on the strength of which the designated foreign exchange bank shall carry out the relevant fund remittance procedures.

13. Upon expiration of the overseas loan term or if the overseas Borrower requests repayment in instalments or prepayment, once the Foreign Exchange Control Authority of the place where the Lender is located approves the remittance of the proceeds from the repayment of principal and payment of interest into the dedicated overseas loan account, the repaid amount shall first be remitted into the foreign exchange accounts for business capital from which the funds were originally transferred out in line with the amount originally transferred out therefrom until such time as the amount thereof has been fully made up. The balance may then be transferred into the current account-related foreign exchange accounts. With respect to the portion for which foreign exchange was originally purchased, conversion procedures may be carried out directly with the designated foreign exchange bank on the strength of the original overseas loan approval document and the foreign exchange purchase receipt.

14. The repaid funds of an overseas loan, when remitted or transferred into the Lender's foreign exchange accounts for business capital, shall not cover the maximum limit of such accounts. The designated foreign exchange bank into which such funds are remitted or transferred, when replying to the confirmation request to the dedicated foreign exchange bank concerning the repaid funds, shall write in the remarks column “loan repayment funds”. An accounting firm may not carry out the verification of the capital of a foreign-invested enterprise on the strength of the reply to such confirmation request to the dedicated foreign exchange bank.

15. A Lender shall accurately report information on the outward remittance and repayment of overseas loan funds in a timely manner in accordance with relevant provisions on the reporting of balance of payments statistics.

16. The Foreign Exchange Control Authority shall confirm the Lender's lending qualifications and loan limit each year during the joint annual inspection of enterprises that invest overseas. If a Lender fails to participate in the joint annual inspection or does not pass confirmation, the Foreign Exchange Control Authority shall cause it to recover the principal of and interest on its overseas loans, and the Lender's overseas loan qualifications may not be extended.

17. If a Lender wishes to convert an overseas loan into an equity investment, it shall carry out the procedures for approval of an outbound investment in accordance with relevant provisions on outbound investment and the procedures for amendment of foreign exchange registration.

18. The State Administration of Foreign Exchange may revise the lending qualification conditions of an enterprise in China as well as the sources, quantities and terms of the overseas loans as appropriate based on China's balance of payments profile and overseas loan situation.

19. If a Lender violates this Circular, it shall be penalised by the Foreign Exchange Control Authority in accordance with the PRC Regulations for the Control of Foreign Exchange and related foreign exchange control provisions. If the circumstances are serious, the Foreign Exchange Control Authority will not approve the Lender's overseas loan applications or applications for extending the term thereof. If the Lender has extended an overseas loan, the Foreign Exchange Control Authority shall order it to terminate and recover such loan.

20. If a designated foreign exchange bank violates this Circular in handling foreign exchange business, it may be penalised by the Foreign Exchange Control Authority in accordance with the PRC Regulations for the Control of Foreign Exchange and related foreign exchange control provisions.

21. The measures for the administration of overseas loans extended by non-bank financial institutions shall be formulated separately.

22. The State Administration of Foreign Exchange is in charge of interpreting this Circular.

23. This Circular shall be effective as of August 1 2009. In the event of a discrepancy between the provisions on foreign exchange control in respect of overseas loans of the State Administration of Foreign Exchange, Issues Relevant to the Administration of Internal Operation of Foreign Exchange Funds of Multinational Corporations (Hui Fa [2004] No.104) and this Circular, this Circular shall prevail.