Provisions on Foreign Exchange Control in Connection with the Cross-border Provision of Security

Article 2: For the purposes of these Provisions, the term “cross-border provision of security” or “cross-border security” means the act whereby a guarantor provides to the creditor legally binding security in writing, wherein it undertakes to perform the relevant payment obligation in accordance with the security contract, and which security could give rise to an international receipt/payment transaction, such as the cross-border receipt/payment of funds or the cross-border transfer of the ownership of assets.

Article 3: Cross-border security is divided into domestic security for a foreign loan, foreign security for a domestic loan and (an)other form of cross-border security based on the places of registration of the parties involved in the security arrangement.

The term “domestic security for a foreign loan” (DSFL) means the cross-border provision of security where the place of registration of the guarantor is in China and the places of registration of both the debtor and creditor are outside China.

The term “foreign security for a domestic loan” (FSDL) means the cross-border provision of security where the place of registration of the guarantor is outside China and the places of registration of both the debtor and creditor are in China.

The term “(an)other form of cross-border security” means the cross-border provision of security in a manner other than the aforementioned DSFL or FSDL.

Article 4: The State Administration of Foreign Exchange and its (sub-)branches (SAFE) shall be responsible for regulating the various types of international receipt/payment transactions arising in connection with the cross-border provision of security.

Article 5: A domestic organisation that provides or is the recipient of cross-border security shall comply with state laws and regulations and the provisions of the department in charge of the industry, and shall carry out relevant exchange control procedures in accordance herewith.

The parties involved in a security arrangement shall, when carrying out matters related to the cross-border provision of security, rigorously adhere to business ethics and act in good faith.

Article 6: SAFE shall effect administration of DSFL and FSDL through registration.

When carrying out DSFL, a domestic organisation shall carry out DSFL registration in accordance with the requirements hereof. Where performance of the security obligations arises under DSFL registered with SAFE, the guarantor may handle the same itself. Following performance, registration of the claim against the foreign party shall be carried out in accordance with the requirements hereof.

A domestic organisation carrying out FSDL shall be in compliance with the relevant conditions specified herein. Under FSDL registered with SAFE, the creditor may itself handle receipt of payment relating to the performance of the security obligations. Following performance, the domestic debtor shall carry out registration of the debt to a foreign party in accordance with the requirements hereof.

Article 7: A domestic organisation that provides or is the recipient of another form of cross-border security shall be in compliance with the relevant exchange control provisions.

Part Two: Domestic security for a foreign loan

Article 8: A guarantor wishing to carry out DSFL may execute a DSFL contract at its discretion provided that it complies with state laws and regulations, the provisions of the department in charge of the industry and exchange control provisions.

Article 9: Once a guarantor has executed a DSFL contract, it shall carry out DSFL registration in accordance with the following provisions:

If the guarantor is a bank, it shall submit the DSFL data to SAFE by the data interface program or other means.

If the guarantor is a non-bank financial institution or an enterprise (a non-bank institution), it shall carry out DSFL registration procedures for contract execution with the local SAFE within 15 working days after execution of the security contract. If a major term of the security contract is amended, amendment of the DSFL registration for contract execution shall be carried out.

The SAFE shall carry out a procedural review of the registration application of a non-bank institution acting as guarantor and carry out the registration procedure in accordance with the principles of truthfulness and compliance.

Article 10: A bank or non-bank financial institution wishing to provide DSFL as a guarantor shall have the appropriate security business qualifications in accordance with the provisions of the department in charge of the industry.

Article 11: The purpose of the proceeds under DSFL shall comply with the following provisions:

(1) the proceeds under DSFL shall be used solely for relevant expenditures falling within the normal scope of business of the debtor, and may not be used to support the carrying out of a relevant transaction outside the normal scope of business of the debtor; a fraudulent trade background may not be fabricated to carry out arbitrage nor may any other manner of speculative trading be carried out; and

(2) without the approval of SAFE, the debtor may not directly or indirectly repatriate the proceeds for use in China through means such as extending a loan or making an equity or securities investment in China.

Article 12: When handling DSFL, the guarantor shall conduct a review of the debtor's entity qualifications, the purpose of the secured proceeds, the anticipated source of the funds for repayment, the likelihood of performance of the security obligations and the background of the relevant transaction, conduct a due diligence investigation on whether the DSFL complies with relevant domestic and foreign laws and regulations and use appropriate means to monitor whether the debtor uses the secured proceeds for the stated purpose.

Article 13: Once the DSFL guarantor's responsibility for payment expires, the debtor discharges the secured debt or performance of the security obligations occurs under DSFL, the guarantor shall carry the procedures for cancelling the registration of the DSFL.

Article 14: If performance arises under DSFL and the guarantor is a bank, it may itself carry out the payment to the foreign party in connection with the performance of the security obligations.

If the guarantor is a non-bank institution, it may directly carry out with a bank the procedures for the purchase of foreign exchange and payment to the foreign party in connection with the performance of the security obligations on the strength of the security registration document. Until the foreign debtor has discharged its debt owed to the domestic guarantor as a result of the performance of the security obligations, the guarantor must temporarily halt the execution of new DSFL contracts unless it secures the approval of SAFE.

Article 15: Where the performance of the security obligations occurs in connection with DSFL, the domestic guarantor or counter guarantor that has become the creditor of the foreign party shall carry out procedures for registration of the claim against the foreign party in accordance with provisions.

Article 16: A domestic individual may serve as guarantor and shall handle DSFL matters as would a non-bank institution.

Part Three: Foreign security for a domestic loan

Article 17: Where a domestic non-financial organisation takes out a loan or secures a line of credit from a domestic financial institution, it may, provided that it satisfies all of the conditions set forth below, accept security provided by a foreign organisation or individual and execute at its discretion an FDSL contract:

(1) the debtor is a non-financial organisation registered and operating in China;

(2) the creditor is a financial institution registered and operating in China;

(3) the subject matter of the security provided is a foreign currency or renminbi loan (excluding entrusted loans) or a binding line of credit extended by the financial institution; and

(4) the form of the security complies with domestic and foreign laws and regulations.

Without approval, a domestic organisation may not exceed the foregoing scope when carrying out FSDL.

Article 18: When the domestic debtor carries out FSDL matters, the domestic financial institution that extended the loan or line of credit shall submit in a centralised manner relevant FSDL data to SAFE.

Article 19: Where the performance of security obligations occurs in connection with FSDL, the domestic debtor shall temporarily halt the execution of new FSDL contracts until it has discharged the debt it owes to the foreign guarantor, unless it secures the approval of SAFE. If it has already executed an FSDL contract, but has not yet drawn down the proceeds or all of the proceeds, it shall temporarily refrain from carrying out new drawdowns, unless it secures the approval of the local SAFE.

With respect to the liability to a foreign party of a domestic debtor arising from the performance of security obligation in connection with FSDL, the balance of the outstanding principal may not exceed its unaudited net asset amount as at the end of the previous financial year.

When a domestic debtor applies for FSDL with the creditor, it shall provide to the creditor true and complete information on its debt defaults, foreign debt registration and discharge of debts relating to FSDL.

Article 20: Where the performance of security obligations occurs abroad in connection with FSDL, the domestic debtor shall carry out registration for short-term foreign debt contract execution and relevant information record filing procedures with the local SAFE. At the stage of registration for foreign debt contract execution, SAFE shall carry out post-event verification of the compliance of the debtor's FSDL related matters.

Part Four: Exchange control in connection with security provided in the form of property

Article 21: The SAFE will not conduct a review of the lawfulness of the security interest provided in the form of property created by parties involved in a security arrangement. The parties involved in the security arrangement shall themselves confirm whether the provisions of the security contract comply with the relevant domestic and foreign laws and regulations, and the provisions of the department in charge of the industry.

Article 22: Where cross-border receipts/payments and transaction matters arise in connection with the provision of security in the form of property, such as a mortgage or pledge, between the guarantor and creditor, and restrictive or procedural exchange control provisions already exist, such receipts/payments and transaction matters shall comply with the provisions.

Article 23: Where the guarantor is in China and the creditor outside China, or vice versa, or the place of registration of the security interest provided in the form of property (or the place where the property is located or the source of the benefits) is in China and either of the guarantor or creditor is outside China, or vice versa, the domestic guarantor or domestic creditor shall carry out the relevant exchange control procedures in accordance with the following provisions:

(1) where at least two out of the place of registration of the guarantor, place of registration of the creditor and the place of registration of the security interest provided in the form of property (or the place where the property is located or the source of the benefits) are located separately, one inside China and one outside China, the method of realisation of the security interest provided in the form of property by the guarantor shall comply with the provisions of relevant laws;

(2) unless otherwise expressly provided, when the guarantor or creditor applies to remit abroad or receive the proceeds derived from disposal of the property provided as security, it may directly submit the application to a domestic bank; once the bank has reviewed the performance of the security obligations for genuineness and compliance, and retained the necessary materials, the guarantor or creditor may carry out the relevant procedures for the purchase or conversion of foreign exchange and cross-border receipt/payment;

(3) where a transfer of the ownership of the relevant property provided as security occurs between the guarantor and creditor and, in accordance with provisions, foreign exchange registration in connection with a cross-border investment is required, the parties shall carry out the relevant registration or amendment of registration procedures.

Article 24: Where a guarantor provides to a creditor property as security for a third party debtor, and the same constitutes DSFL or FSDL, it shall carry out security registration procedures in accordance with the provisions for DSFL or FSDL and observe relevant provisions.

Where security provided in the form of property registered with SAFE was not lawfully created for any reason, the guarantor shall carry out with SAFE the procedures for cancelling the relevant registration.

Part Five: Supplementary provisions

Article 25: Where a domestic organisation wishes to provide or accept a form of cross-border security other than DSFL or FSDL, it may execute a cross-border security contract at its discretion, provided that it complies with domestic and foreign laws and regulations and these Provisions. Unless otherwise expressly specified by SAFE, the guarantor and debtor are not required to carry out registration or record filing with SAFE in respect of the other form of cross-border security.

Where a domestic organisation carries out another form of cross-border security, it may handle the performance of the security obligations at its discretion. If the secured foreign claim/debt requires prior examination and approval or prior check and approval, or a change in the foreign claim/debt occurs as a result of performance of the security obligations, the relevant examination and approval procedures or registration procedures shall be carried out in accordance with provisions.

Article 26: When a domestic debtor is to pay the security fee to a foreign party, it may directly apply to a bank in accordance with the relevant provisions for exchange control in connection with service trade.

Article 27: A guarantor and debtor may not execute a cross-border security contract where they are well aware or ought to be aware that the performance of security obligations has occurred.

Article 28: When a guarantor, debtor or creditor applies to a domestic bank for the purchase and payment of foreign exchange or the receipt and conversion of foreign exchange in connection with the cross-border provision of security, the domestic bank shall conduct a due diligence review of the background of the cross-border security related transaction to determine whether the security contract complies with Chinese laws, regulations and these Provisions.

Article 29: The check and approval, registration or record filing of a cross-border security contract by SAFE and other administrative matters and administrative requirements specified herein do not constitute conditions for the entry into effect of a cross-border security contract.

Article 30: The SAFE shall periodically conduct an analysis of the overall situation of DSFL and FSDL and pay close attention to the effect that the cross-border provision of security has on international receipts and payments.

Article 31: When SAFE conducts a review or inspection of the cross-border security of a domestic organisation, the parties involved in the security arrangement and the domestic bank shall provide relevant information as requested by SAFE. Where the cross-border provision of security is carried out in a manner that is not in accordance with these Provisions and relevant provisions, SAFE shall impose penalties in accordance with the PRC Regulations for the Control of Foreign Exchange.

Article 32: The State Administration of Foreign Exchange may, with the objective of maintaining the international balance of payments, revise the method of administration of the cross-border provision of security as appropriate.

Article 33: The State Administration of Foreign Exchange is in charge of interpreting these Provisions.