By Li Jinnan, Partner, King & Wood’s Banking & Finance Group

In order to support outbound investment projects of domestic PRC entities, to meet the policy demands of domestic credit support, and to further facilitate trading and investing, the State Administration of Foreign Exchange ("SAFE") on July 30th, 2010 promulgated the Notice on the Administration of Overseas Security by Domestic Entities (the "Notice"), which came into effect as of the date of promulgation. This Notice relaxes the restrictions on financing of outbound projects.

The Notice has simplified the administrative procedures for obtaining overseas security, mitigated some of the former restrictions, and clarified relevant administrative requirements.Compared with former policies, the Notice has primarily brought about the following changes:

1 Expansion Quota-based Administration and Change in Quota Determination Methods

Pursuant to the Notice, banks are no longer the only ones that may apply to SAFE for granting of overseas financing security quotas; non-banking entities that frequently provide overseas security may also apply to SAFE for granting of a quota if they have a sound internal management system.Within such a quota granted by SAFE, such banks or entities may provide ordinary security in favor of foreign entities without the need to obtain SAFE approval on a case-by-case basis.The provision by banks of non-financing security in favor of foreign residents is neither subject to quota restrictions nor to SAFE’s case-by-case approval.

The determination of a quota balance for overseas security by banks and non-banking financial institutions are no longer based on the amount of their foreign currency-denominated registered capital or working capital; instead, determination will be made based on the consolidated amount of their paid-in registered capital or working capital both in RMB and in foreign currencies, or on their net foreign currency-denominated assets.For any non-financial enterprise, its quota shall not exceed 50% of its net assets.

2 Fewer Restrictions on Qualification of Debtor

Under the Notice:
(a) in the case of overseas financing security provided by banks, the qualification of the debtors is not subject to any regulatory restrictions and will determined by banks in accordance with their business needs and the capacity of their internal risk control;

(b) in the case of overseas non-financing security provided by banks, the Notice only requires that either the debtor or the beneficiary is a domestic entity or otherwise a foreign entity which has equities directly or indirectly owned by a domestic entity;

(c) in the case of overseas security provided by non-banking financial institutions, the debtor has to be a domestic entity ora foreign entity which was established by, or which has equities directly or indirectly owned by, a domestic entity;

(d) in the case of overseas security provided by a non-financial enterprise, the debtor is a domestic or foreign entity established by, or which has equities directly or indirectly owned by, the security provider.

3 Fewer Restrictions on Financial Status of the Debtor

The Notice has revoked the rule that no overseas security shall be allowed for debtors operating at a loss. Pursuant to the Notice, the debtor must have a positive net assets value, and must have recorded a profit for at least one of the most recent three years.Where the debtor carries on long-term projects such as resource development, it must have recorded a profit for at least one of the most five years. In case of debtors having an operating history of shorter than three years (for general businesses) or five years (for resource development businesses), no requirement for profit is mandatory.

The Notice has also revoked the rule that the value of security is limited by proportion of Chinese contributions where the debtor is a Sino-foreign domestic or overseas joint venture.

4 Simplification of the Administration Procedures

The Notice has revoked the prior verification requirement for banks to every time perform overseas security.The Notice also provides for periodical filing, instead of real-time registration, for quota-based overseas security by banks.

5 Removal of Approval Exemption Treatment for Wholly Foreign Owned Enterprises

The Notice provides that wholly foreign owned enterprises shall be treated with reference to the policy for general enterprises when providing overseas security and shall obtain case-by-case verifications and registrations, and are no longer entitled to approval exemption policies.

6 Others

The Notice also has specific provisions in the following aspects:

(a) Required proportion of the net assets to gross assets of non-financial enterprises providing overseas security is unified for trading and non-trading enterprises and is now 15%;

(b) In case of overseas financing security provided for outbound investments, the proceeds of the security shall not, by way of lending, equity investment or securities investment, whether directly or indirectly through third party, be transmitted inbound for domestic use;

(c) Counter-security provided for debtors by domestic entities in favor of the domestic security provider under overseas security is no longer administered as overseas security.