On 30 July, the State Administration of Foreign Exchange published the Administration of External Guarantees by Domestic Institutions Notice, which expands the scope of external guarantees subject to annual balance management and streamlines the administrative review process. This has positive significance for promoting overseas investment and financing activities.
Scope of external guarantees
In the Notice, “an external guarantee” refers to the provision of a guarantee by a domestic institution (a guarantor) to a foreign institution (a guarantee beneficiary) for the debts of a foreign or domestic institution (a guaranteed party); the provision of a guarantee by a domestic institution to another domestic institution for the debts of a foreign institution is subject to external guarantee management. The provision of a counter-guarantee by a domestic institution for a domestic or foreign institution (the guaranteed party) to the foreign guarantor of such domestic or foreign institution is also subject to external guarantee management.
Guarantees provided by banks
The Notice stipulates that domestic banks are not required to apply on a case-by-case basis for approval of the provision of external finance guarantees within the quota approved by the foreign exchange bureau. Pursuant to the Notice, that quota for an individual bank must not exceed 50% of its paid-up capital or working capital in combined domestic and foreign currencies, or the net amount of its foreign exchange assets. The existing quota percentage set out in the External Guarantees by Domestic Institutions Administrative Measures and their Implementing Rules (i.e. that the sum of the external guarantees by financial institutions, guarantees by domestic and foreign exchange and foreign exchange debts must not exceed 20 times a bank’s own foreign exchange funds) will no longer apply. Guaranteed parties in external guarantees by banks are not subject to the restrictions on the shareholding relationships with domestic institutions, the proportion of net assets and profit status.
The Notice says domestic banks that provide external non-finance guarantees are not subject to quota control and not required to apply for approval to the foreign exchange bureau on a case-by-case basis. However, either the guaranteed parties or beneficiaries in these external non-finance guarantees must be a legal person incorporated inside China, or an institution established outside China by a domestic institution whose equity is held or indirectly held by the domestic institution.
Guarantees provided by non-banking financial institutions and enterprises
The Notice requires, in principle, domestic non-banking financial institutions and enterprises to apply to the foreign exchange bureau for approval of the provision of external guarantees on a case-by-case basis, and allows those non-bank financial institutions and enterprises with a large amount of external guarantee business and associated internal management practices to apply for approval of a quota for the balance of external guarantees. In the Measures Governing External Guarantees by Domestic Institutions Implementing Rules, wholly foreign-owned enterprises may “provide their own external guarantees without having to obtain approval from the foreign exchange bureau on a case-by-case basis”. However, this “super-national treatment” is abolished in the Notice, and the external guarantees provided by wholly foreign-owned enterprises are also subject to balance management or approval on a case-by-case basis. The Notice says if a guarantor is a non-banking financial institution, it should make reference to a bank for its base for approving a quota; if a guarantor is an enterprise, its ratio of net assets to total assets must in principle be no less than 15%, and the approved quota or the balance of external guarantees approved on a case-by-case basis must not exceed 50% of its net assets. It should be noted that non-banking financial institutions and enterprises subject to balance management are still required to report to the foreign exchange bureaus for approval on a case-by-case basis if they provide guarantees for the equity of foreign target companies to be acquired by domestic enterprises.
The Notice stipulates that the guaranteed parties in external guarantees provided by non-banking financial institutions and enterprises must satisfy the following requirements: where the guarantor is a non-banking financial institution, the guaranteed party must be a legal person incorporated inside China, or an institution established outside China by a domestic institution whose equity is held or indirectly held by the domestic institution; where the guarantor is an enterprise, the guaranteed party must be an enterprise established by the guarantor inside or outside China, whose equity is held or indirectly held by the guarantor; the net assets of the guaranteed party must be positive; and the guaranteed party must have been profitable for at least one year in the last three years (five years for enterprises engaged in the development of resources).
Filing and registration formalities
The Notice says the provision of external guarantees by banks, as well as by non-banking financial institutions and enterprises, is subject both to a periodic filing system and to a registration system. Under the periodic filing system, domestic banks should conduct filing formalities at their local foreign exchange bureaus on a monthly basis. Filing is deemed to be registration. The foreign exchange bureaus will not issue proof of registration of external guarantees. Financing of external guarantees provided by banks within their quotas will not take effect on the strength of the filing with the foreign exchange bureaus. Under the registration regime, domestic non-banking financial institutions and enterprises must conduct registration formalities on a case-by-case basis at the local foreign exchange bureaus within 15 days of concluding an external guarantee contract; the foreign exchange bureaus will issue proof of registration after verifying external guarantees subject to balance management.
It must be noted that if a guarantor provides an external mortgage, pledge, etc., for its own lawful external debts or other external payment obligations, it is not subject to restrictions on relevant requirements for external guarantees, quota management or approval by the foreign exchange bureau on a case-by-case basis, but it should complete periodic filing or registration on a case-by-case basis at the local foreign exchange bureau.
Performance of contracts for external guarantees
The Notice says if a domestic bank has to perform a contract for an external guarantee, it may itself make an external payment under the contract. However, domestic non-banking financial institutions and enterprises are required to apply to the local foreign exchange bureaus for approval on a case-by-case basis. The Notice also sets forth the procedures for the purchase, settlement and payment of foreign exchange during the performance of contracts for external guarantees.
Upon implementation of the Notice, the other five documents regulating this area, such as the State Administration of Foreign Exchange Revising the Management Methods for the Provision of Financing External Guarantees by Domestic Banks for Foreign-invested Enterprises Notice (Hui Fa [2005] No. 61), will be repealed.
Business Law Digest is compiled with the assistance of Haiwen & Partners. The authors can be emailed at baochen@haiwen-law.com. Readers should not act on this information without seeking professional legal advice.
