Circular on Issues Concerning the Administration of the Provision of Security to Foreign Parties by Organisations in China

(Issued by the State Administration of Foreign Exchange on, and effective as of, July 30 2010.)

Hui Fa [2010] No.39

Branches and offices of the State Administration of Foreign Exchange of each province, autonomous region and municipality directly under the central government, the Shenzhen, Dalian, Qingdao, Xiamen and Ningbo municipal branches of the State Administration of Foreign Exchange, and head offices of designated foreign exchange banks in the PRC:

With a view to intensifying reform of the administration of the provision of security to foreign parties by organisations in China and supporting the participation by organisations in China in international economic and financial cooperation, the State Administration of Foreign Exchange has, pursuant to the Measures for the Administration of the Provision of Security to Foreign Parties by Organisations in China (Yin Fa [1996] No.302) (the Measures), decided to further revise the method of administration of the provision of security to foreign parties by organisations in China. We hereby notify you of relevant issues as follows:

1. For the purposes of this Circular, the term “provision of security to a foreign party” (Foreign Security), means the act whereby an organisation in China (the guarantor) undertakes, pursuant to the PRC Security Law, the PRC Property Law and the Measures, with respect to a foreign organisation (the beneficiary of the security) by means of a guarantee, mortgage or pledge, etc., that, in the event that the debtor (a domestic or foreign organisation) fails to perform its obligations in accordance with the contract, it will perform such obligations or the beneficiary will, in accordance with the PRC Security Law and the PRC Property Law, receive payment on a priority basis from the proceeds derived from the discount auction or sale of the mortgaged or pledged property.

When an organisation in China provides security for a foreign party, if the secured party is a foreign organisation and the beneficiary of the security is an organisation in China, such provision of security shall be deemed subject to control as Foreign Security, and the provisions hereof shall apply.

For the purposes of this Circular, the term “Foreign Security for financing purposes” means that the Foreign Security secures a master contract that is of a financing nature, and includes but is not limited to security provided for loans, the issuance of bonds, lease financing, etc. as well as other forms of Foreign Security determined as such by the State Administration of Foreign Exchange.

For the purposes of this Circular, the term “Foreign Security for other than financing purposes” means forms of Foreign Security other than Foreign Security for financing purposes, and includes but is not limited to security provided for quality, for responsibility for completion of a project, for the invitation for and submission of bids, for advance payment, for deferred payment, for responsibility for performance under a contract for the sale and purchase of goods as well as other forms of Foreign Security determined as such by the State Administration of Foreign Exchange.

For the purposes of this Circular, the term “enterprise” means a non-finance legal person, other than a bank or non-bank financial institution, established in accordance with the law.

2. The State Administration of Foreign Exchange subjects the provision of Foreign Security by organisations in China either to balance control or approval on a case by case basis. The State Administration of Foreign Exchange subjects the provision of Foreign Security for financing purposes by banks in China to balance control, and it subjects the provision of Foreign Security by non-bank financial institutions and enterprises mainly to approval on a case by case basis, however, it may subject those that satisfy certain conditions to balance control.

3. A bank in China with the qualifications to engage in the business of providing security that provides Foreign Security for financing purposes may apply to the (sub-) branch or office of the State Administration of Foreign Exchange of the place where it is located (Safe Bureau; branches and offices of the State Administration of Foreign Exchange are, where appropriate, individually referred to as a Safe Branch) for a Foreign Security balance limit (a Limit). A bank may provide Foreign Security for financing purposes within its Limit determined by the Safe Bureau without being required to apply to the Safe Bureau for approval on a case by case basis.

A bank in China with the qualifications to engage in the business of providing security that provides Foreign Security for other than financing purposes shall not be subject to Limit control and need not apply to the Safe Bureau for approval on a case by case basis, but shall comply with the relevant risk management provisions of the industry regulator.

4. A bank in China shall submit its Limit application in accordance with the following principles:

(1) a bank in China with legal personality must submit its application in the name of a legal person;

(2) a foreign bank branch that has not established an organisation with legal personality in China may either independently submit an application or the Limit application may be submitted altogether by the main reporting branch of the affiliated bank (branch) in China that centrally manages the Limit.

5. A bank in China shall, by April 15 each year, submit the application for its Limit for the year in question to the SAFE Bureau of the place where it is located. The local SAFE Branch shall collate the same and conduct the preliminary examination.

Once the Safe Branches have conducted the preliminary exam-inations, a Request for a Limit for the Balance of Security Provided to Foreign Parties for the Year XXX (see Annex 1) shall be completed and submitted together with the Limit application reports of the Safe Branches and each bank to the State Administration of Foreign Exchange for approval. The Safe Branch shall determine and allocate the approved Limit to the banks.

The Limit for the previous year shall continue in effect until the Limit for the year in question has been determined. If the Limit for the year in question is reduced, the bank may not take on new Foreign Security business until it has reduced its balance of Foreign Security for financing purposes to below the Limit for the year in question.

When a bank applies for a Limit for the first time it may, as required, submit an application for determination of a Limit to the State Administration of Foreign Exchange through the Safe Branch of the place where it is located.

6. The Safe Bureau shall determine a bank's Limit mainly on the basis of its paid-in capital in both renminbi and foreign currency, its working capital, the scale of its net assets in foreign exchange, etc. The Safe Bureau may appropriately revise a bank's Limit by taking into account its performance in respect of the Foreign Security that it has provided and its legal compliance with respect to Foreign Security during the previous year, the results of the assessment of its implementation of foreign exchange control provisions, its business development plan for the year in question as well as the state's balance of payments status during, and policy control requirements for, the year in question.

7. In principle, the Limit of a single bank may not exceed 50% of its paid-in capital in both renminbi and foreign currency or working capital, or the entire amount of its net foreign exchange assets.

8. When applying for an annual Limit, a bank shall submit the following materials:

(1) an application report and an Application for a Limit for the Balance of Security Provided to Foreign Parties by an Organisation in China (see Annex 2);

(2) its consolidated balance sheet, and profit and loss statement for the previous year, as well as a Form for Detailing the Source and Application of Foreign Exchange Funds (if the application is a first-time application, photocopies of its financial business permit and business licence shall additionally be provided);

(3) details of its Foreign Security business and legal compliance during the previous year (not applicable to newly established banks);

(4) its business plan for the year; and

(5) other materials as required by the Safe Bureau.

9. The Limit of a bank in China that is subject to balance control may be used directly by the bank itself or, alternatively, broken up and allocated to the bank's domestic (sub-)branches (including foreign bank (sub-)branches subject to centralised management of their Limits and those that have not established an institution with legal personality in China) for their use.

10. If a bank provides Foreign Security for financing purposes, it shall strictly ensure that the balance does not exceed the Limit determined by the Safe Bureau, that the secured party is not subject to restrictions such as an equity relationship with an organisation in China, net asset percentage and profitability, and shall comply with state laws and regulations on the provision of security, etc. and relevant administrative provisions of the industry regulator.

11. If a bank provides Foreign Security for other than financing purposes, at least one of the secured party or the beneficiary shall be a legal person legally incorporated in China, or at least one of them shall be an organisation established offshore by an organisation in China or one in which an organisation in China has acquired an equity interest or indirect equity interest in accordance with provisions.

12. The head office of a bank or the main reporting branch of a bank subject to centralised management of its Limit shall collate, in a timely manner, the information on all of the Foreign Security provided by the bank, and, within the first five working days of each month, carry out the procedures for the regular record filing of its Foreign Security with, and complete a Form for the Collation and Record Filing of the Security Provided to Foreign Parties by a Bank in China, a Form for the Record Filing on a Case by Case Basis of the New Security Provided to Foreign Parties for Financing Purposes Entered into by a Bank in China and a Form for the Record Filing on a Case by Case Basis of the Performance in Respect of the Security Provided to Foreign Parties for Financing Purposes by a Bank in China (see Annex 3 (1), (2) and (3)) and submit them to, the Safe Bureau of the place where it is located. A bank carrying out the record filing procedures in accordance with the foregoing, shall be deemed to have registered, and the Safe Bureau will not issue for the bank documents evidencing registration of its Foreign Security.

If Foreign Security is provided in the name of a (sub-)branch in China of a bank, such (sub-)branch shall also submit the relevant data to the Safe Bureau of the place where it is located in accordance with the foregoing requirements, but the same shall not be incorporated into the statistics of data on Foreign Security in the Safe Bureau system.

Record filing with the Safe Bureau shall not be a condition for the entry into effect of Foreign Security for financing purposes that falls within a bank's Limit. Foreign Security provided in excess of a bank's Limit without authorisation shall be dealt with in accordance with the Measures and other such provisions.

13. If a non-bank financial institution or an enterprise in China wishes to provide Foreign Security, it shall apply to the Safe Bureau for approval on a case by case basis. A non-bank financial institution or an enterprise (including wholly foreign-owned enterprises) that relatively frequently provides Foreign Security and whose internal management is compliant may, in respect of the Foreign Security that it provides (including security provided both for financing and other than financing purposes), have its legal person apply to the Safe Bureau for the determination of a balance Limit by making reference to the procedure specified in Articles 5 and 8 hereof. For Foreign Security that falls within the Limit, the non-bank financial institution or the enterprise in China need not apply to the Safe Bureau for approval on a case by case basis.

(1) If the guarantor is a non-bank financial institution, the determination of its Limit shall be handled with reference to Articles 6 and 7 hereof.

(2) If the guarantor is an enterprise, its net assets may not in principle be less than 15% of its total assets, and its balance Limit determined by the Safe Bureau or the balance of its Foreign Security approved on a case by case basis may not exceed 50% of its net assets.

14. When a non-bank financial institution or an enterprise provides Foreign Security, it shall comply with the following provisions:

(1) When a non-bank financial institution or an enterprise provides Foreign Security, the secured party shall satisfy the following conditions:

(a) if the guarantor is a non-bank financial institution, the secured party must be a legal person legally incorporated in China or an organisation established offshore by an organisation in China or one in which an organisation in China has acquired an equity interest or indirect equity interest in accordance with provisions;

if the guarantor is an enterprise, the secured party must be an enterprise established in or outside China by the guarantor or one in or outside China in which the guarantor has acquired an equity interest or indirect equity interest by the prescribed procedure;

(b) the amount of the secured party's net assets shall be a positive value; and

(c) the secured party shall have realised a profit in at least one of the last three years; if the secured party is involved in resource development or other such long-term project, it shall have realised a profit in at least one of the last five years; if less than three years (in the case of an ordinary enterprise) or five years (in the case of a resource development enterprise) have elapsed since the establishment of the secured party, the mandatory profit requirement shall be waived.

A repurchase guarantee provided to a bank in China by a real estate developer in China for a premises mortgage loan for a non-resident shall not be subject to this Item.

(2) If a non-bank financial institution or an enterprise that is subject to balance control is to provide Foreign Security to which any of the following circumstances applies, it must report the same to the Safe Bureau for approval on a case by case basis:

(a) if the proposed Foreign Security fails to comply with this Circular and relevant provisions in terms of Limit size, amount of net assets and profitability conditions, etc., it shall report the same to the State Administration of Foreign Exchange for approval on a case by case basis via the Safe branch of the place where it is located; or

(b) if the secured subject matter is a debt repayment obligation under a financing contract, and the secured party's financing objective is to use the proceeds to acquire an equity interest in an offshore enterprise (the target company); or if the secured party is the equity transferee (the payer) under a contract for the transfer of the equity of an offshore enterprise (the target company) and the secured subject matter is the obligation to pay the equity transfer price under the equity transfer contract, the same shall be reported to the Safe branch of the place where the guarantor is located for approval and the guarantor shall provide the approval document of the state's overseas investment authority concerning the relevant enterprise's (the secured party or its affiliated enterprise) participation in the investment in or acquisition of a project offshore (for the relevant operational guidelines, see Annex 4).

Foreign Security that has been approved on a case by case basis by the Safe Bureau shall be included in the Limit. If the Limit is insufficient, the Safe Bureau shall revise the Limit while it gives approval on a case by case basis.

(3) A wholly foreign-owned enterprise not subject to balance control shall carry out relevant procedures for approval of Foreign Security on a case by case basis, for case by case registration, etc. with reference to the principles governing the administration of ordinary enterprises.

(4) A non-bank financial institution or an enterprise shall carry out the procedures for case by case registration of Foreign Security with the Safe Bureau of the place where it is located within 15 days after execution of the Foreign Security contract. With respect to Foreign Security subject to balance control, the local Safe Bureau shall review the qualification conditions other than those of the guarantor itself in accordance with relevant provisions, and issue a document evidencing registration of the Foreign Security.

15. When an organisation in China performs in respect of the Foreign Security that it has provided, it shall carry out the relevant performance procedures in accordance with the following provisions:

(1) if a bank is required to perform in respect of Foreign Security for financing purposes or for other than financing purposes that it has provided, it may itself handle the payment to a foreign party relating to such Foreign Security. The funds for performance in connection with the Foreign Security may be sourced from a foreign exchange advance provided by the bank itself, a security deposit deposited in foreign exchange or renminbi by a counter-guarantor or an amount paid by the counter-guarantor after the occurrence of a debt default;

if a non-bank financial institution or an enterprise is required to perform in respect of Foreign Security that it has provided, it must apply to the Safe Bureau of the place where it is located for approval on a case by case basis. When it carries out the procedures relating to performance in respect of the Foreign Security, it may purchase foreign exchange;

(2) when a bank or non-bank financial institution acts as guarantor and its counter-guarantor is able to fulfil its counter-security payment obligations on its own initiative, the counter-guarantor may directly carry out the foreign exchange purchase or payment procedures with the bank on the strength of the document evidencing performance in respect of the security, and the guarantor shall itself carry out the procedures for crediting the relevant foreign exchange funds to the account. If the debtor under the Foreign Security performs its obligation of repaying the guarantor, the debtor and the guarantor may themselves carry out their respective payment and receipt procedures;

if a debtor or counter-guarantor fails to perform its repayment obligation or security performance obligation for any reason, reference may be made to the provisions for the conversion and sale of foreign exchange by a bank on behalf of a debtor for the purchase of foreign exchange in respect of the renminbi funds recovered by legal means by the guarantor from the debtor or counter-guarantor; and

(3) if an enterprise acts as guarantor or a counter-guarantor as mentioned in Item (2) and the funds it recovers from the debtor are in foreign exchange, it may carry out foreign exchange conversion procedures after receiving the approval of the SAFE Bureau.

16. When an insurance company in China provides Foreign Security, the administration of its submission of data and performance in respect of the security shall be handled with reference to that for banks, that is to say, its performance in respect of the Foreign Security shall not require the approval of the Safe Bureau, and it shall be subject to regular record filing of the Foreign Security in accordance with Article 12.

17. The following provisions shall apply when an organisation in China provides Foreign Security:

(1) an organisation in China that provides Foreign Security shall comply with state laws and regulations on security and the industry regulator's relevant administrative provisions on security business, and strengthen its relevant risk controls;

(2) when an organisation in China provides Foreign Security, if the secured party is an equity joint venture established in or outside China, the Foreign Security it provides shall not be subject to the restrictions on the equity investment percentages of domestic and foreign organisations;

(3) if Foreign Security for financing purposes is provided for an offshore investee enterprise, the funds under the security may not be repatriated directly, or indirectly through a third party by way of a loan, equity investment or securities investment, and used in China; the guarantor in China, or the parent in China of the offshore investee enterprise shall monitor the funds obtained by the secured party to ensure that they are used in the secured party's offshore production and other business activities;

(4) when an organisation in China provides Foreign Security for other than financing purposes, it may, in line with its specific business requirements and provided that the security obligations are fully described, omit to expressly specify the security amount and term in the contract; when carrying out the Foreign Security approval, registration and record-filing procedures, the Safe Bureau or guarantor may determine the amount and term with the closest connection to the guarantor's payment obligation in the contract under the security as the reference amount and term for the relevant performance obligations under the security; however, the actual payment obligation of the guarantor under the security shall not be restricted by the reference amount and term;

(5) the amount of the debt under a Foreign Security shall not be limited by the size of the guarantor's foreign exchange revenues;

(6) unless otherwise provided herein, an organisation in China shall carry out Foreign Security contract execution, registration, amendment, performance and cancellation procedures in accordance with the Measures, the Implementing Rules for the Measures for the Administration of the Provision of Security to Foreign Parties by Organisations in China ([97] Hui Zheng Fa Zi No. 10; the Implementing Rules) and other relevant provisions;

(7) the transfer of claims and debts under a Foreign Security shall comply with foreign exchange control provisions.

18. The counter-security provided by an organisation in China to the offshore guarantor of an organisation in or outside China (debtor) shall be subject to administration applicable to Foreign Security, and the organisation in China providing the counter-security and the organisation in or outside China that is the secured party must comply with this Circular.

When an organisation in China provides Foreign Security for an organisation in or outside China (the debtor) in accordance with Foreign Security provisions and another organisation in China, on behalf of the debtor, provides counter-security for the organisation in China providing Foreign Security, the same shall not be subject to administration as Foreign Security, but relevant foreign exchange control provisions shall be complied with.

19. When a guarantor provides a mortgage, pledge, etc. for a foreign party, it shall comply with the relevant provisions of the department in charge of mortgaged and pledged property.

When a guarantor provides a mortgage, pledge, etc. to a foreign party to secure its own lawful foreign debt or other foreign payment obligation, it shall not be subject to the qualification conditions relating to Foreign Security and shall not be required to have such mortgage or pledge included in a Limit or apply to the Safe Bureau for approval on a case by case basis, but shall carry out regular record filing for Foreign Security or case by case registration procedures with the Safe Bureau of the place where it is located. If it is required to perform in respect of the Foreign Security it has provided and it is a non-bank financial institution or an enterprise, it shall apply to the Safe Bureau for approval on a case by case basis.

If a guarantor provides a mortgage or pledge to secure the debt of a third party, foreign exchange control provisions identical to those for third party guarantees shall apply in terms of qualifications and conditions, unless there are special provisions governing the same.

20. The Safe Bureau shall conduct monitoring inspections of the Foreign Security business of organisations in China. If an organisation in China provides Foreign Security without authorisation, provides Foreign Security in excess of its determined Limit or fails to handle Foreign Security business in accordance with this Circular and other related provisions, the Safe Bureau may, depending on the circumstances, take measures against it such as reducing its Limit for the year or moving it from balance control to approval on a case by case basis and impose penalties in accordance with the PRC Foreign Exchange Control Regulations and other related regulations. If the circumstances are serious, the Foreign Security business of the organisation in China shall be suspended.

21. Upon receipt of this Circular, Safe Branches shall promptly forward the same to central sub-branches and the financial institutions in their respective jurisdictions.

22. This Circular shall be effective as of the date of issuance. The first paragraph of Article 5 of the Measures and Article 21 of the Implementing Rules shall cease to apply from the date of issuance hereof. The State Administration of Foreign Exchange, Circular on Revising the Method of Administration of the Provision of Security to Foreign Parties for Financing Purposes by Banks in China for Offshore Investee Enterprises (Hui Fa [2005] No.61) issued on August 16 2005 and other such relevant regulatory documents shall be repealed simultaneously (for details, see Annex 5). In the event of a discrepancy between relevant provisions of this Circular and other regulations issued by the State Administration of Foreign Exchange, this Circular shall prevail.

Annex 1. Request for a Limit for the Balance of Security Provided to Foreign Parties for the Year XXX

Annex 2. Application for a Limit for the Balance of Security Provided to Foreign Parties by an Organisation in China

Annex 3. Form for the Collation and Record Filing of the Security Provided to Foreign Parties by a Bank in China, Form for the Record Filing on a Case by Case Basis of the New Security Provided to Foreign Parties for Financing Purposes Entered into by a Bank in China and Form for the Record Filing on a Case by Case Basis of the Performance in Respect of the Security Provided to Foreign Parties for Financing Purposes by a Bank in China

Annex 4. Application for Approval of the Provision of Security to Foreign Parties by an Organisation in China on a Case by Case Basis and Operational Guidelines for the Approval of the Provision of Security to Foreign Parties by an Organisation in China on a Case by Case Basis

Annex 5. List of Repealed Documents Relating to the Provision of Security to Foreign Parties