Opinion: Simplifying cross-border security

On May 19 2014, the State Administration of Foreign Exchange (SAFE) promulgated the Provisions on Foreign Exchange Control in Connection with the Cross-border Provision of Security (跨境担保外汇管理规定) (New Provisions). This milestone in SAFE's history has overturned the PRC regulatory regime on cross-border security upheld since 1998, with the Implementing Rules for the Measures for the Administration of the Provision of Security to Foreign Parties by Organisations in China (境内机构对外担保管理办法实施细则) and the Circular on Issues Concerning the Administration of the Provision of Security to Foreign Parties by Organisations in China (国家外汇管理局关于境内机构对外担保管理问题的通知).

Road to liberalisation

The New Provisions are SAFE's response to Premier Li's demand for streamlining its administration and delegating certain powers. Under the New Provisions, the validity of any cross-border security agreement is no longer subject to SAFE's approval, registration, filing or any other SAFE administrative requirements. Onshore security for offshore debts (内保外贷) (Nei bao wai dai) and offshore security for onshore debts (外保内贷) (Wai bao nei dai) no longer require a quota or prior approval but only subsequent SAFE registration. For any other types of cross-border security (such as an onshore entity providing security for its foreign debts owed to foreign entities), even subsequent SAFE registration is no longer required.

The New Provisions signify the PRC government is changing its view of and method for foreign exchange control, which has contributed to the extraordinary surge of the country's foreign exchange reserves in the past decade. The administration is now focused on post examination and supervision rather than prior approvals and verifications, entities and individuals rather than transactions and businesses, presumption of innocence and subsequent accountability rather than presumption of guilt and prior authentication and on “negative list” items rather than “positive list” items. These all enable market participants to freely enter into transactions unless explicitly prohibited by law.

Market impact

The liberalisation of the New Provisions in terms of quotas, prior approvals and/or subsequent registrations tremendously simplifies the SAFE procedures for cross-border security and shortens the timeline for achieving security. Market participants are now encouraged to adopt onshore security structures that offer increased flexibility, certainty and much more accessibility in cross-border transactions. One example of such security structures are offshore bonds issued by a PRC company's offshore subsidiaries, a welcomed product in the market if the PRC parent company could provide a guarantee for the bonds. Though in the past, the onshore parent company was only able to provide a keep-well letter, which has no legally-binding force due to the difficulty (if not impossibility) of obtaining SAFE approval, while now such quasi-security would be replaced by a legally-binding guarantee, which may contribute to raising the credit rating of the offshore bonds.

In addition, onshore individuals are explicitly allowed to provide security under Nei bao wai dai, whereas previously, the individual could only provide security along with an onshore parent company to support the parent's offshore subsidiary obtaining offshore loans. This change will facilitate offshore financing in transactions that require an actual onshore individual controller's security.

Pending elaboration

Although a great breakthrough in the administration of cross-border security, the New Provisions still leave room for clarifications. One major aspect is the coordination of the New Provisions with other legislation, such as the Supreme People's Court's judicial interpretation on the validity of a Nei bao wai dai security agreement. The Supreme People's Court's judicial interpretation in 2000 on the PRC Security Law (中华人民共和国担保法) provides that a Nei bao wai dai security agreement shall be rendered null and void if not registered with SAFE. After the entry into force of the New Provisions on June 1 2014, it is highly likely that the PRC courts will respect the New Provisions and not invalidate a Nei bao wai dai security agreement that has not been registered with SAFE. Although the court's position is uncertain, the Supreme People's Court is expected to resolve this issue once and for all by amending its judicial interpretation from 2000.

Yun Chen, King & Wood Mallesons, Shanghai