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China – PRC: Rules Relating To The Provision Of Cross-Border Security Are Relaxed.

24 June, 2014

 

Legal News & Analysis – Asia Pacific – China –  International Trade

 

New regulations came into force on 1 June 2014

 

The Provisions on the Administration of Foreign Exchange for Cross-Border Security (the “New Regulations”), published by the State Administration of Foreign Exchange (“SAFE”) in the PRC replace 12 existing regulations providing for cross-border security.
 
Reflecting a huge step forward by SAFE, the New Regulations apply to and regulate all kinds of cross-border security structures, including the following three categories, which are based on the places of registration of the parties:
 
i. Nei Bao Wai Dai or “Outbound Security,” where the security provider is registered onshore (i.e. Chinese), and the obligor and the creditor are both registered offshore; thus, for example, where a guarantee is given, only the guarantor is Chinese.
 
ii. Wai Bao Nei Dai or “Offshore Security,” where the security provider is registered offshore, but the obligor/debtor and the creditor are both registered onshore (i.e. Chinese); using the same example again, where a guarantee is given, the guarantor is not Chinese, but both the other parties are.
 
iii. Any other types of cross-border security in which one of the creditor and debtor is onshore (Chinese) but the other is offshore, and thus the cross-border element is between these two parties; the security provider may be either onshore or offshore.
 
The main changes are as follows:
 
  • The validity of any cross-border security agreement is no longer subject to SAFE approval, registration, filing or other SAFE administrative requirements. A security agreement would include, for example, a mortgage, pledge, guarantee or standby letter of credit.
  • In relation to (i) Outbound Security and (ii) Offshore Security, the previous system of quota management and pre-approval has been replaced with a requirement for registration of the security following its execution. Prior approval of the security is not required.
  • For (iii), any other types of cross-border security, no registration or filing is required.
  • The distinction in the administrative schemes regarding security for finance purposes and security for non-finance purposes has been abandoned. This means that banks are no longer subject to any quota management in relation to security for finance purposes.
  • Individuals are now explicitly permitted to provide Outbound Security by reference to the corresponding rules applicable to non-banking institutions.
  • SAFE approval on the enforcement of security is abolished.

 

In practice, these changes mean:
 
  • In relation to charterparties, where, for example, a Chinese guarantor provides to a foreign shipowner a parent guarantee of performance by the charterer of a charterparty, if (a) the charterer is a foreign company, the guarantor must register the guarantee with SAFE within 15 days but if (b) the charterer is a domestic Chinese company then the guarantee will be characterised as (iii) above, “any other type” of cross-border guarantee and will not require any form of filing, registration or approval.
  • For an English P&I Club providing a guarantee, then (a) if this is directly to a Chinese company as claimant on behalf of a foreign shipowner then no registration will be required but (b) if it is provided on behalf of a Chinese shipowner this will fall within type (ii) above and will require registration.
  • In relation to refund guarantees, the position is as follows: at present, where a Chinese yard is obliged under a shipbuilding contract to procure a refund guarantee from a Chinese bank, that Chinese bank will file general information of that guarantee (and any material amendment to it) with SAFE on a monthly basis as part of a risk management requirement, although prior SAFE approval is not required, nor is SAFE registration. Under the New Regulations, that position would appear to be unchanged.

 

We expect that these New Regulations will be warmly welcomed by the international market, offering, as they do, flexibility, certainty and accessibility when using cross-border security.
 
Ince & Co
 
For further information, please contact:
 
Vincent Xu, Partner, Ince & Co
 
Haoran Zhang, Ince & Co
 

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