Circular on Matters Relevant to Regulating the Business of Providing Domestic Security for Foreign Loans Conducted by Insurance Institutions

(Issued by the China Insurance Regulatory Commission and the State Administration of Foreign Exchange on, and effective as of, February 1, 2018.)

Bao Jian Fa [2018] No.5

Insurance group (holding) companies, insurance companies, insurance asset management companies and relevant custodians:

With a view to regulating the engagement in the business of providing domestic security for foreign loans by insurance group (holding) companies and insurance companies (Insurance Institutions), strengthening the oversight of offshore financing business and guarding against offshore financing risks, we, pursuant to relevant policies such as the Tentative Measures for the Administration of the Application of Insurance Capital, the Tentative Measures for the Administration of Overseas Investment of Insurance Capital, the Implementing Rules for the Tentative Measures for the Administration of Overseas Investment of Insurance Capital and the Provisions on Foreign Exchange Control in Connection with the Cross-border Provision of Security, hereby notify you of relevant matters as follows:

1 .    For the purposes of this Circular, the term “business of providing domestic security for foreign loans” (the Business) means the financing act whereby an Insurance Institution applies to a domestic bank for the issuance of a letter of guarantee or standby letter of credit and the domestic bank provides security for a special purpose vehicle, or an insurance group (holding) company directly provides security for a special purpose vehicle, in order to obtain the extension of a loan to the aforementioned special purpose vehicle by a bank abroad.

For the purposes of this Circular, the term “special purpose vehicle” (SPV) means an offshore enterprise directly established or indirectly controlled abroad by an Insurance Institution for offshore investment/financing purposes, using domestic or foreign assets or equity interests that it lawfully owns and in which it holds more than 95% of the equity.

2 .     When engaging in the Business, an insurance group (holding) company may provide countersecurity to the domestic bank. When engaging in the Business, an insurance company may provide countersecurity to the domestic bank through the insurance group (holding) company to which it belongs.

3 .     When providing security or countersecurity, an insurance group (holding) company may do so in the form of a guarantee or an asset mortgage (pledge). If provided in the form of an asset mortgage (pledge), self-owned monetary assets, such as investment capital, capital reserve or undistributed profits shall be used.

4 .     An Insurance Institution shall, in accordance with the principle of management of asset and liability matching, comprehensively consider factors such as the liquidity of the asset portfolio, the interest and exchange rate levels on international financial markets and future change trends, financing costs and returns, etc. to prudently engage in the Business, improve its risk control mechanisms, make its business operation procedures compliant and duly guard against relevant risks.

5 .     An Insurance Institution wishing to engage in the Business shall satisfy the qualification conditions for the outbound investment of insurance capital, secure approval to engage in the outbound investment of insurance capital, have a relatively strong capacity to manage asset and liability matching and financing management capabilities. It shall also establish a sound offshore financing management system, have professional offshore financing management personnel and expressly specify the relevant details for the offshore financing decision-making mechanism, division of responsibilities, business procedures and risk management.

When an Insurance Institution is to engage in the Business, its comprehensive solvency adequacy ratio as at the end of the previous quarter shall not be less than 150%, and an insurance company's comprehensive solvency risk rating shall not be less than the Grade A regulative category. The SPV for which an Insurance Institution engages in Business shall bear first borrower responsibilities, have a foreseeable stable cash flow revenue and have relatively strong solvency.

6 .     An Insurance Institution wishing to engage in the Business shall require the deliberation and approval of its shareholders' general meeting or board of directors, produce a written resolution, make compliant its internal operating procedures and establish a liability pursuit mechanism.

7 .     Where an Insurance Institution engages in the Business and the loan proceeds obtained for any one of its SPV's investment projects is at least US$50 million (or the equivalent in another currency), the same shall be reported in advance to the Insurance Asset Management Association of China (IAMAC) and the project may proceed only after IAMAC has arranged for an evaluation thereof.

8 .     An Insurance Institution that engages in the Business shall objectively and rationally control its financial leverage ratio in light of its management of asset and liability matching, the balance of financing proceeds actually obtained by means of the Business may not exceed 20% of its net assets as at the end of the preceding quarter, and the same shall be included as part of the management of its financial leverage monitoring ratio. The net assets of an insurance group (holding) company shall be the group-level net assets.

9 .     The financing proceeds derived from the Business by an Insurance Institution shall be used solely for the investment projects of its SPV. The investment projects of such SPV shall comply with the policy direction and relevant requirements of the state in respect of outbound investments, be stringently subject to the provisions on outbound investments in the encouraged, restricted and prohibited categories and comply with relevant policies of the China Insurance Regulatory Commission (CIRC) and the State Administration of Foreign Exchange (SAFE) on the offshore application of insurance capital.

10 .   If the offshore project investment carried out by an Insurance Institution by means of the Business constitutes a material equity investment, the check and approval procedures shall be carried out therefor, for other project investments, the reporting procedure shall be carried out in accordance with relevant provisions, the source of the funds for the investment projects shall be explained in the specific investment project check and approval or report, and the check and approval or record filing procedure for an outbound investment project shall be carried out in accordance with the requirements of relevant policies of the National Development and Reform Commission.

11 .    The outbound investment carried out by an Insurance Institution by means of the Business shall comply with the transparency principle, the major asset category for the investment project or the underlying assets of the investment project shall be determined and, on the basis of the consolidated statements, the offshore investments and domestic investments shall be calculated together to arrive at the insurance capital application ratio and it shall be ensured that the regulatory policies for insurance capital application ratios are complied with.

12 .    An Insurance Institution carrying out an offshore project investment shall engage an independent third-party professional firm to carry out a comprehensive and detailed due diligence investigation on the investment project so as to ensure that it does not contain any major legal obstacles or legal defects and to avoid the occurrence of any title disputes. All of the relevant transaction documents in the course of an outbound investment project transaction shall expressly require the transaction counterparty to complete the procedures for the registration/record filing of the relevant assets at the necessary stages and, at the time of delivery of the assets, provide the relevant asset certificates and confirmation documents so as to ensure that the Insurance Institution genuinely, lawfully and validly secures ownership of the relevant assets.

An Insurance Institution shall establish a sound document filing system, and file in a timely manner and duly keep all transaction documents. In the event of a dispute or controversy arising over the rights to the assets, the Insurance Institution shall protect its lawful rights and interests in accordance with the law by referencing the relevant laws and the specific contract terms.

13 .    An Insurance Institution shall notify its outbound investment custodian of the Business it is about to launch in a timely manner and place the proceeds from the foreign loan secured by domestic security and the investment project in the custody of the outbound investment custodian. The Insurance Institution's receipt and payment activities relating to the proceeds from the foreign loan secured by domestic security shall be carried out through the SPV's dedicated account with the offshore custodial agent.

The outbound investment custodian shall comply with the transparency principle, valuate, and carry out the accounting for, the Insurance Institution's and its SPV's outbound investment project, carry out investment operation monitoring in a consolidated fashion and submit monitoring reports and relevant data, statements, etc. to the CIRC. The Insurance Institution shall cooperate with the outbound investment custodian in performing its custodial responsibilities and provide to the outbound investment custodian information relevant to the performance of its custodial responsibilities in a timely, accurate and complete fashion.

14 .    An Insurance Institution that engages in the Business shall select relevant domestic and offshore firms that have sound management mechanisms, a good market reputation and that operate in a rational and effective manner with which to cooperate, rationally design its SPV's capital structure, reasonably arrange the currency, amount, costs and term of its financing proceeds, duly draw up the repayment or refinancing arrangements in advance and effectively manage and control liquidity risks and exchange rate risks.

15 .    An Insurance Institution that engages in the Business shall strengthen the operation and management of its investment projects, regularly monitor the relevant offshore market's dynamic development, assess the investment projects' asset values and quality, enhance the SPV's operational effectiveness and risk prevention capabilities and guard against unforeseen debt repayment risks and operational risks arising from the offshore bank calling a loan on short notice or the bankruptcy and liquidation of the SPV.

16 .    If the Business engaged in by an Insurance Institution could give rise to security fulfillment, the Insurance Institution shall, in the first instance, dispose of the SPV's outbound investment projects or take a market-based approach such as securing other lawful and compliant offshore financing to mitigate the risk of security fulfillment, so as to avoid the security fulfillment affecting the cross-border flow of capital.

17 .    An Insurance Institution that engages in the Business shall stringently abide by relevant domestic and foreign laws and regulations, the provisions of the industry regulator, provisions on cross-border renminbi and exchange control, carry out its financing acts in a compliant manner, strengthen compliance management and guard against legal risks. An Insurance Institution's outbound investment risk officer shall be liable for the lawfulness and compliance of the Business.

18 .    An Insurance Institution that engages in the Business may not:

(1)        engage in the Business in a disguised manner to obtain credit loans abroad;

(2)        engage in the Business for an offshore enterprise other than an SPV as specified herein;

(3)        use assets arising from the investment of debt funds, such as the liability reserve, to provide security or countersecurity in any manner;

(4)        have an investment project or the underlying assets of the investment project that violate(s) state macro-control policies, industry policy or outbound investment policies;

(5)        use the proceeds from a foreign loan secured with domestic security for business other than the SPV's investment projects or to extend a loan to a third party;

(6)        intend to have the security for the foreign loan fulfilled to deceitfully obtain foreign exchange or to transfer assets abroad;

(7)        fabricate a business background to engage in arbitrage or illegal speculative trading; or

(8)        perform another act as prohibited by the CIRC.

19 .    An Insurance Institution shall report relevant data and information in accordance with CIRC requirements and, within five working days after executing a contract for the provision of domestic security for a foreign loan, report to the CIRC on the specific business details, with the contents of such report to include but not be limited to the basic particulars of the investment project, the arrangement for the source of funds, information on the cooperating bank and SPV, information on the essential factors of the financing, the financing-related documents, the measures for the provision of security and countersecurity, etc.

If an extension of the Business occurs, the Insurance Institution shall, within five working days after the execution of the contract for the extension of the Business, report on the operation and risk status of the investment project, as well as the reason for the extension of the Business, information on the important factors of the extension and the extension-related documents.

If a major risk event that could result in fulfillment of the security occurs, a report shall be made to the CIRC and SAFE within three days from the date of the occurrence of the event. If the issue still cannot be solved after employing the fulfillment risk mitigation measures mentioned in Article 16 hereof and fulfillment of the security ultimately occurs, a report shall be made to the CIRC within three days after fulfillment of the security and, in accordance with exchange control provisions, the domestic guarantor or the domestic counter guarantor that has become the creditor of the foreign loan shall carry out foreign claim registration.

20 .    An Insurance Institution that is already engaging in the Business shall adjust such Business in strict accordance herewith within three months from the date of the issuance hereof so as to ensure that its Business complies with regulatory provisions.

21 .    The CIRC will strengthen its information sharing and synergistic oversight with relevant ministerial level authorities such as the People's Bank of China and SAFE, strengthen the monitoring of, and early risk warning related to, the outbound investment of insurance capital and guard against cross market, cross industry and cross currency contagion of outbound investment risks.

22 .    If an Insurance Institution violates this Circular in the course of engaging in the Business, the CIRC will record its improper act and order it to rectify the matter; if the circumstances are serious, it will take regulatory measures such as suspending its engagement in the Business or outbound investment business.

23 .    This Circular shall be effective as of the date of issuance.