By King & Wood Mallesons’ Banking & Finance Group

At the end of 2014, Shenzhen Municipal Government issued Pilot Measures on QDIE (Qualified Domestic Investment Enterprise), which makes PE funds to have another exit channel. To take this opportunity, we herein briefly introduce and comment on four relatively new forms of loans, and their respective entry and exit channels for PE funds which could be adopted by Shenzhen market, namely the cross-border RMB loans in Qianhai, RMB overseas lending, QFLP (Qualified Foreign Limited Partner), and QDIE. It is worth noting that these channels, such as cross-border RMB loans in Qianhai and QFLP, are not only limited for Shenzhen but also exist at other localities with small variations, while RMB overseas lending can be used throughout the country. As for QDIE, it is a unique channel to Shenzhen.

1. Cross-Border RMB Loans in Qianhai

Shenzhen Central Sub-branch of the People’s Bank of China (“Shenzhen Sub-branch”) issued the Interim Measures for Administration of Cross-Border Renminbi Loans in Qianhai on December 27, 2012, and issued the Implementing Rules of the Interim Measures for Administration of Cross-Border Renminbi Loans in Qianhai on January 6, 2013, which preliminarily established and improved the system of the cross-border RMB loans in Qianhai.

In accordance with such measures and implementing rules, enterprises registered in Qianhai could borrow RMB loans from Hong Kong banks operating RMB business for the construction and development of Qianhai. This opened a separate channel for entry of foreign loans aside from the then foreign debt channels, and enterprises registered in Qianhai could borrow cross-border RMB loans at low cost without taking up foreign debt quotas.

Even so, at the initial stage, the cross-border loans in Qianhai are few in numbers. The reason for that is that the expression, “used for the construction and development of Qianhai,” was made a narrow understanding at that time, i.e., the loan project has to be located within Qianhai. Due to the small area and early stage of Qianhai, however, there exists no huge capital demand. Therefore, “used for the construction and development of Qianhai” was made a generalized understanding, i.e., construction and development of the enterprises of Qianhai themselves equates to the construction and development of Qianhai. In practice, for equity investment enterprises of Qianhai who borrow cross-border loans for the purchase of equity of enterprises outside Qianhai, and for finance leasing companies of Qianhai who borrow cross-border loans for doing finance leasing transactions with enterprises outside Qianhai, Shenzhen Sub-branch will not refuse their filing of cross-border loans on the ground that such use of loans does not conform to the regulations. Of course, if Qianhai enterprise shall borrow cross-border loans for the development of real estates out of Qianhai directly, Shenzhen Sub-branch will not accept such filing.

From the perspective of the lenders’ qualifications, cross-border loan in Qianhai currently is still limited to Hong Kong banks operating RMB business, but there have been such transactions on the market where Hong Kong banks lend cross-border loans to enterprises of Qianhai by using funds of other local banks through funded sub-participation. Likewise, foreign non-bank institutions may also make loans to enterprises of Qianhai in the same way. As far as we know, Qianhai Administration Office has applied to the People’s Bank of China for expanding the scope of who can be the lenders.

Generally speaking, the foreign debt quota for foreign-funded finance leasing enterprises is bigger than the general foreign-invested enterprises, thus there have been such transactions on the market where a lot of domestic enterprises use foreign finance leasing enterprises as the financing channels to lead funds of overseas affiliated party inbound by combining foreign loans borrowed by finance leasing enterprises with sale-leaseback. We understand that by using funded sub-participation, cross-border loans and sale-leaseback, domestic finance leasing enterprises registered in Qianhai can also use cross-border RMB loans in Qianhai as channels for similar financing channels purposes. And in such transactions, the finance leasing companies, as channel, could remove any produced liabilities and assets from the balance sheet through relevant arrangements.

Because a letter of credit issued by domestic banks in favor of the borrowing enterprises of Qianhai is required by Hong Kong loan-providing banks in many cross-border loan transactions, the total costs of cross-border loans have increased to a level similar to the interest rates of domestic RMB loans. In addition, the fact that Hong Kong banks receive numerous letters of credit issued by domestic banks also attracted attention of Hong Kong Monetary Authority, who in turn has put forward requirements. In the long run, Hong Kong banks might need to consider accepting guarantee of assets provided by enterprises of Qianhai or their affiliated enterprises directly. These guarantees are RMB overseas guarantees, for which the registration of external guarantee by the State Administration of Foreign Exchange is not required.

2. RMB Overseas Lending

On July 5, 2013, People’s Bank of China issued Circular of the People’s Bank of China on Simplifying the Procedures for Cross-border RMB Business and Improving the Relevant Policies (the “Circular”).

According to the stipulations concerning the RMB overseas lending business of non-financial institutions within the territory of China in Clause 3 of this Circular, we understand that:

  • The People’s Bank of China does not put specific restrictions on the qualification of non-financial institutions operating RMB overseas lending business within the territory of China, the borrowers of overseas loans, or the loan quota;
  • There is no specific restriction on the RMB capital pool mode by which lead enterprises could muster RMB funds when domestic associated enterprises making loans to foreign investors;
  • Non-financial institutions within the territory of China can carry out overseas lending business without filing to local People’s Bank of China, with specific business handled through bank institutions by providing true materials such as overseas loan agreement (including amount, terms, interest rates, purposes, the repayment method), the description of the parties’ relationship, the funding source of loans, etc.

Compared with the restrictions on the qualifications of domestic and overseas enterprises, the borrowers of overseas loans, and the loan quotas specified under the domestic enterprises overseas foreign currency loan regulations, the overseas RMB loan business has been almost completely opened to domestic non-financial institutions, which has been proved by some completed RMB overseas lending business and the publicity materials regarding cross-border RMB business which are published by the Branch of the People’s Bank of China of one municipality separately listed on the State Plan.

As far as we can know, the reason that People’s Bank of China opened overseas RMB lending business to non-financial institutions within the territory of China is based on the following background: cross-border corporations have accumulated amounts of funds within the territory of China, but always have no favorable channels to make the funds returned to the headquarters. Despite of the advanced fund managing skills of headquarters of these cross-border corporations, within the limitation of domestic capital account controlling, most cross-border corporations’ funds within the territory of China is operated separately with that of their overseas parent companies. In this regard, Shanghai Head Office of People’s Bank of China launched “cross-border RMB lending business pilot project”, giving RMB overseas loan quotas to those who meet the pilot requirements, such as Chinese & foreign-funded cross-border corporations registered in Shanghai. Within the scope of loan quotas, the headquarters of cross-border corporations can enter into loan agreements directly with their overseas parent companies (or affiliated enterprises), in which they can agree on an interest rate so as to finish the enterprise’s own RMB overseas lending business. Based on this pilot project, People’s Bank of China issued the Circular to further open the RMB overseas lending business of non-financial institutions within the territory of China.

With the increasing sophistication and experiences of “going out”, more and more Chinese-funded enterprises realize that, compared with equity investment, creditor’s right investment has advantages of prior status, convenience of recycling procedure, etc. Therefore, lots of overseas investment projects are accompanied with creditor’s right investment besides “equity investment”. However, as far as we know, most of these creditor’s right investments are foreign currency loans rather than RMB loans, which might be partially related to the fact that many Chinese-funded enterprises are still not clear about the preferential policies of RMB overseas lending.

3. QFLP Qualified Foreign Limited Partner

On July 15, 2014,SAFE issued the Circular of the State Administration of Foreign Exchange on Issues concerning the Pilot Reform of the Administrative Approach Regarding the Settlement of the Foreign Exchange Capitals of Foreign – invested Enterprises in Certain Areas, (“No. 36 Circular”), the Article 4 of which stipulated that “foreign-invested enterprises whose main business is investment (including foreign-invested investment companies, foreign-invested venture capital enterprises and foreign-invested equity investment enterprises) are allowed to directly settle their foreign exchange capitals and transfer the amount therefrom to the account of an invested enterprise according to the actual amount of investment, provided that the relevant domestic investment project is real and compliant.”

In other words, foreign-invested equity investment enterprises in the pilot areas, after determining the investment project, may directly settle the foreign exchange capitals injected by foreign LP (Limited Partner) to the relevant invested company’s account, without regard to considering the settlement quota issues.

Foreign-invested equity investment enterprises include foreign-invested venture capital enterprises, foreign-invested investment companies, and foreign-invested equity investment enterprises. However, the threshold for investors of foreign-invested venture capital enterprises is high and the invested company shall be a type of entrepreneurial enterprise, with foreign-invested investment companies mainly serving for cross-border companies. In addition, these two types of companies are deemed to be administrated as foreign direct investment in the terms of industrial policy. Therefore, few PE funds will enter the border by adopting these methods.

In contrast, the threshold for investors of foreign-invested equity investment enterprises is relatively low, and in terms of industrial policy, it is to be administrated as the domestic reinvestment of foreign invested enterprise, so it has a great advantage, but it is currently limited to certain pilot areas. On November 26, 2012, Shenzhen issued the Interim Measures on the development of Shenzhen’s foreign-invested equity investment enterprises, and Qianhai will be the first pilot area. On February 6, 2013, after the promulgation of Shenzhen Investment Equity Practice pilot foreign-invested enterprises, the pilot area was extended to the whole city.

Before 2008, foreign PEs often enters china through establishing a wholly foreign-owned or joint venture enterprise and then converts the capital into RMB before investment. However, after the promulgation of Circular of the Comprehensive Department of the State Administration of Foreign Exchange on Relevant Operating Issues concerning Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-funded Enterprises on August 29, 2008 by SAFE, in addition to foreign-invested venture capital enterprises and foreign-invested investment companies, other types of companies are not allowed to use the settled capital funds to conduct equity investments. Foreign-invested equity investment companies do not enjoy any exception, and they have to apply for QFLP settlement amount from the SAFE. However, because SAFE is worried about the issues of hot money inflows through this channel and takes this very cautiously, as a result, this channel, as the carrier of QFLP pilot, has problems such as small investment amount and difficult approvals.

After the promulgation of No. 36 Circular, as Qianhai is not only the pilot area of No. 36 Circular but also the pilot area of QFLP, similar as other pilot areas, it will probably become the main channel for overseas PE capitals entering into China.

4. QDIEQualified Domestic Investment Enterprise

On December 8, 2014, the office of the People’s Government of Shenzhen municipality promulgated the Shenzhen Municipal People’s Government forwarding Municipal Finance Office’s Interim Measures regarding the development of QDII overseas investment pilot work (Shenfuban Notice [2014] No.161), which marks the official establishment of Shenzhen QDIE pilot policy. At present, a number of institutions have obtained the pilot qualifications, including Great Wall Fu Hao Fund Management Co., Limited funded by Great Wall Securities, Southern Capital Management Co., Limited funded by Southern Capital Fund, and Shenzhen Qianhai Zhong Cheng Equity Investment Fund Management Co., Limited funded by Zhong Cheng Trust.

According to the above pilot measures, the investment management institutions initiated by domestic and foreign institutions in Shenzhen may apply for “overseas investment fund management company,” pilot qualifications, and then raise funds from QDII within the approved foreign exchange quota. Such “overseas investment entity” shall be established and managed by means of entrustment in Shenzhen and the raised funds shall be used for the direct investment of foreign projects.

Compared with QDII and pilot QDLPs in certain area, QDIE has great breakthroughs in terms of the manager, the threshold for foreign investors and the investment scope etc. In fact the Measures does not impose any restriction on the investment scope of the “foreign investment entity”, but from our understandings, QDIE shall not invest in the areas forbidden by the Administrative Measures for Outbound Investment (Order of the Ministry of Commerce [2014] No.3).

Nevertheless, QDIE has a few sparkling points. First, in respect of the amount of investment, Shenzhen QDIE pilot has obtained 1 billion USD quotas approved by the SAFE. However, whether QDIE pilot shall have the same problems as former QFLP that the investment amount is small and acquisition of approval is difficult is yet to be seen. Second, the expectation for RMB appreciation may make it difficult for fund management companies to raise funds within the territory of china as the foreign investment can only use foreign exchange rather than RMB. However, whether direct RMB overseas investment is permitted in the future remains to be seen. Third, whether the “foreign investment entity” conducting overseas investment needs to go through the procedures with the NDRC, MOFCOM and SAFE like the normal enterprises remains to be seen as the pilot measures do not have specific regulations in respect of that issue. And these points may greatly affect QDIE’s role practically.

The above are the brief introductions and commentaries for the four new channels for cross-border funds in the Shenzhen market. Please don’t hesitate to contact us if you have any queries. We remain at your disposal for any further discussion concerning this topic.

Key contact:

Cheng Xueli


Banking & Finance/Shenzhen


Zhuo Hai

Senior Associate

Banking & Finance/Shenzhen


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