Investment of overseas institutions in domestic NPAs

By Wang Zhenxiang, Jingtian & Gongcheng
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Affected by the pandemic, secondary market activities of domestic non-performing assets (NPAs) have decreased significantly, making disposal remarkably more difficult.

The external transfer of NPAs, once again attracting the attention of regulators and industry players alike, is stepping into a new era with the optimisation of national policies on foreign currency and capital management.

The external transfer to overseas investors of domestic NPAs refers to the transfer of non-performing loans (NPLs) ‒ including those legally acquired by financial asset management companies ‒ generated in the course of domestic bank operation.

At present, the main sources of domestic NPA invested in by overseas institutions are financial asset management companies (AMCs). It should be noted that laws and policies do not restrict overseas institutions from accepting the transfer of NPAs from local AMCs, and some pilot areas have begun to allow direct transfer of NPL assets from banks under their jurisdiction to overseas investors.

After such transfer of NPAs to overseas investors, the subject of creditors’ rights switches from domestic to overseas, resulting in liabilities of domestic enterprises to overseas enterprises – which is subject to relevant regulations on overseas debt filing and registration, as well as an overseas exchange management system in China.

Filing and registration

Wang Zhenxiang, Jingtian & Gongcheng, Investment of overseas institutions in domestic NPAs
Wang Zhenxiang
Jingtian & Gongcheng

Filing with the National Development and Reform Commission (NDRC). As stipulated in a 2016 NDRC foreign investment document, the system of prior filing and registration of overseas debt and post-facto reporting of issuance information under the earlier 2015 NDRC foreign investment document shall be applicable to the transfer of NPLs to overseas investors.

Unlike the issue of overseas debt by enterprises on their own initiative, submission of overseas debt filing and registration materials for the transfer of NPLs is not made by domestic debtors, but domestic financial institutions.

The application materials include: information on the NPA (the principal and interest of debt, composition, geographical distribution and third-party evaluation report); external transfer agreement; public disposal announcement in the news media; overseas investor’s corporate registration certificates; credit performance and other supporting documents; notarial certificates issued by notary offices on the transfer process; and legal opinions issued by law firms.

Filing with administrations of foreign exchange. Within 30 days after domestic institutions have lawfully obtained approvals for the transfer of NPAs to overseas investors, overseas investors shall complete the registration formalities with the required materials at the administrations of foreign exchange of the jurisdiction where the main assets or domestic agents (if applicable) are located.

Required registration materials include applications, approvals or filing documents for the transfer of NPAs to overseas investors, photocopies of the main terms of debt assignment agreements, and agency agreements (if a domestic agent is entrusted).

If ownership of registered assets is changed or lost due to buyback, sale (transfer), liquidation, transfer of shares or other reasons, overseas investors shall go through the change or cancellation procedures within 30 days of the change or loss.

Proceeds remittance application. Proceeds obtained by overseas investors through liquidation and retransfer may apply directly to banks for foreign exchange purchase and payment in accordance with the requirements of the 2015 State Administration of Foreign Exchange (SAFE) Issuance Document No. 3, provided that the application materials are complete.

Required materials mainly include applications and agency documents, approvals or filing documents for external disposal, and documents proving the source of income from disposal, such as enforcement documents and judicial auction documents.

External guarantee procedures arising from NPA transfer. Change of beneficiaries of original guarantees arising from transfer of NPAs to the overseas investor is not subject to the provisions on external guarantee management, but new guarantees established for the NPA would still be subject to them.

Domestic pilots

In 2017, Shenzhen became the first pilot area in mainland China to allow local financial institutions to carry out cross-border transfer of NPAs according to the 2017 SAFE Reply Document No. 24.

Since then, the pilot has been gradually expanded to the Greater Bay Area, Hainan, Shanghai, Beijing and other places. In the pilot areas, overseas investors are allowed to accept the transfer of NPLs from banks within such jurisdictions either directly or through an agent.

Direct overseas transfer in the pilot areas should go through overseas debt registration formalities for the proposed transfer of NPAs on a case-by-case basis. Written materials such as the information on external transfer of NPLs and external transfer agreement, containing commitments on the legal compliance and authenticity of the transfer of assets and reflecting the real conditions of underlying loans and asset guarantees, shall be submitted.

If the materials provided by the institutions meet the requirements, the administrations of foreign exchange will register the overseas debt and issue the business registration certificates, and the registered amount shall be the book value of the NPL transferred to overseas investors.

Institutions may open special accounts for overseas debts directly with the bank, with the business registration certificate for receiving the deposit and the consideration for the NPA transfer – and the received consideration can be paid to NPL transferors within the jurisdiction in the original currency, or after willing settlement of foreign exchange.

According to the requirements of the local operation guidelines, the deposit shall not be settled and used before the NPA transaction is concluded. If the transaction is not reached, the deposit shall be returned via the path of original payment, barring any deduction for breach of contract. Such special accounts shall be cancelled in time after being used.

Policy trend

Even though the rate of return on investment in domestic NPAs has slightly declined due to the pandemic, it remains a desirable choice to invest in China’s NPAs, and even credit assets, for the low cost of capital compared to abroad.

As China improves its foreign exchange management service capacity, cross-border trade and investment will be further facilitated and optimized, while the experience gained in pilot areas will also be gradually promoted.

Investment of overseas institutions in domestic NPAs will also evolve from direct acquisition to multi-level and multi-form co-operation with domestic institutions and capital, while the subject of transfer may also broaden from NPLs, such as to include bank trade financing assets.

Wang Zhenxiang is a partner at Jingtian & Gongcheng


Jingtian & Gongcheng

Room 3001, Area A, China Resources Tower
No.1366 Qianjiang Road, Hangzhou 311500, China

Tel: +86 571 8992 6523

Fax: +86 571 8992 6501


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