On 11 June 2012, the State Administration of Foreign Exchange of the PRC (SAFE) issued the Notice on Foreign Exchange Administration regarding Encouraging and Guiding the Healthy Development of Private Investment (Notice). The Notice was issued to implement the Several Opinions on Encouraging and Guiding the Healthy Development of Private Investment issued by the State Council of the PRC in May 2010 (Opinions), and is one of many implementation rules to the Opinions recently published by Chinese authorities to relax the framework for private investment.
Why is the Notice significant?
The Notice allows Chinese companies to use foreign currency loans obtained from domestic banks to fund offshore subsidiaries. Previously, onshore companies could only use their foreign currency reserves, foreign currency purchased with RMB or foreign currency pools approved by local SAFE branches to fund offshore subsidiaries.
The Notice also allows a Chinese national, as a joint security provider and together with a Chinese company, to provide security for offshore financing obtained by the Chinese company's offshore subsidiary.
How can a Chinese national provide security?
Pursuant to the Notice, a Chinese national can provide security by the following steps:
- the Chinese company provides security to its offshore subsidiary to obtain offshore financing
- the Chinese national acts as a joint security provider with the Chinese company for the financing, and
- the Chinese company obtains approval from SAFE for the provision of the security and registers it with SAFE.
The Chinese national may provide the security by way of guarantee, mortgage, pledge or other legitimate methods. The procedures for application and approval are set out below:
- the Chinese national applies, through the Chinese company, to the local SAFE branch for the security,
- SAFE will review the application but will not conduct a substantive review of the qualifications, means of security and secured assets of the Chinese national, and
- when SAFE approves the security provided by the Chinese company, SAFE may simultaneously register the security provided by the Chinese national and the Chinese company respectively.
The Administrative Measures of Foreign Exchange for Individuals issued in 2006 allow a Chinese national to provide funding or security to offshore companies if he or she complies with the relevant requirements and completes registration with SAFE. Since no detailed implementation rules were issued before this Notice, there was no clear way for a Chinese national to register the funding or security with SAFE which proved to be a practical obstacle. Whilst the Notice allows a Chinese national to provide offshore security under limited circumstances, it is still uncertain whether a Chinese national can provide funding or standalone security to offshore companies in practice.