Background

On June 9, 2009, the State Administration of Foreign Exchange (“SAFE”) issued the Notice on Certain Issues Relating to Foreign Exchange Administration on Offshore Lending by Domestic Enterprises (《关于境内企业境外放款外汇管理有关问题的通知》) (the “Notice”) (effective as of August 1, 2009), in an effort to deal with the difficulty of offshore Chinese-funded enterprises that have “gone abroad” in obtaining financing offshore and increasing working capital, to encourage more domestic enterprises with strong capital strength to “go abroad”, and to enhance the efficacy in the use of funds by domestic enterprises.

Before the issue of the Circular, regulatory requirements with regard to offshore lending were mainly found in the SAFE Notice on Certain Issues Relating to Internal Management of Foreign Currency Funds by the Multinational Companies (《国家外汇管理局关于跨国公司外汇资金内部运营管理有关问题的通知》) published by SAFE on October 18, 2004 (the “2004 Notice”). The purpose of the 2004 Notice is to optimize the allocation of foreign currency funds of, and to facilitate and support the utilization of foreign currency inter-company loans between members of multinational companies headquartered in the PRC. In accordance Clause 23 of the Notice, if there is any inconsistency between the 2004 Notice and the Notice in respect of foreign exchange administration on offshore lending, the Notice shall prevail.

We set out below an introduction on the key features of the Notice and its relevant provisions. This Bulletin is for general guidance only, and shall not be relied upon as a substitute for definite advice in respect of specific cases.

Key Features of the Notice

1. Lender and Borrower under an Offshore Lending In accordance with the Notice, eligible domestic enterprises of any type would be permitted to provide foreign currency loans to their wholly-owned subsidiaries or equity participation enterprises legally incorporated offshore.

2. Qualification Requirements for Offshore Lending The requirements set out in the Notice for offshore lending by domestic enterprises to their offshore wholly-owned subsidiaries or equity participation enterprises include: Both the lender and the borrower have been legally incorporated with fully paid-up registered capitals; All foreign direct investment projects of the lender in the past years have been verified by the regulatory authorities in charge of foreign investments and filed with SAFE under foreign exchange registrations, and the lender (incorporated and existing for more than one year) has gained a second (or above)-grade ranking in the latest joint annual inspection of foreign investments, etc .

3. Forms of Offshore Lending The forms of offshore lending as provided in the Notice are as follows: (1) Direct lending, namely the domestic enterprise extends loan facilities directly to its wholly-owned subsidiaries or equity participation enterprise legally incorporated offshore; (2) Entrustment loans, namely lending in the form of entrustment loans through a designated foreign exchange bank or the finance company of an enterprises group duly incorporated and qualified to conduct foreign exchange business.

4. Lending Threshold The Notice supervises the offshore lending by the outstanding balance amount, and provides that the outstanding balance of a lender’s offshore lending shall be limited to the lower of: (i) 30% of the lender’s owner equity, and (ii) the duly registered investment amount of the Chinese party as agreed.

5. Verification of Outbound Remittance of Funds The Notice simplifies the verification procedure of outbound remittance of the foreign exchange funds. It is provided that, subject to the verified offshore lending threshold and the effective term of lending, domestic enterprises engaged in offshore lending are permitted to re-lend the funds that have been repaid without the need to obtain SAFE verification for each of the loans.

6. Sources of Funds for Lending The sources of funds for offshore lending as provided in the Notice have been expanded to not only include the self-owned foreign currency funds of the lender (as provided in the 2004 Notice), but also include foreign currency funds converted from RMB funds and the funds in the foreign exchange capital pool as verified by SAFE .

7. The Income and Payment Scope of the Special Account for Lending Compared to the 2004 Notice, the Notice has enlarged the income and payment scope of the Special Account for Lending.

Domestic Transfer of Funds The Notice simplifies the verification procedure for domestic transfer of funds under offshore lending. Except for the outbound remittance of funds under the offshore lending from the Special Account for Lending and the inbound remittance of funds for repayment of principal and interest or enforcement of security to the Special Account for Lending, other domestic transfer of funds between the relevant foreign exchange accounts and the Special Account for Lending would not be subject to the verification by the local SAFE. The lender may proceed with such transfer with the designated foreign exchange bank by presenting the relevant verification documents in respect of the offshore lending.

9. Statistical Monitoring and Risk Precaution under Offshore Lending The Notice improves the statistical monitoring and risk precaution mechanism under offshore lending. For example, matters such as the verification of the offshore lending threshold, the opening of the Special Account for Lending, the domestic transfer of foreign exchange capital and the outbound and inbound remittance are supervised under the SAFE foreign exchange administration information system for foreign direct investments. Meanwhile, the Notice provides SAFE with the discretion to make timely adjustment to the qualification requirements for offshore lending, the sources of funds, the amount and the term of the lending etc., according to the balance of payments and the development in the offshore lending business.

Conclusion

Compared to the 2004 Notice, the Notice has to the greatest extent reduced the qualification requirements for offshore lending, expanded the sources of fund, and simplified the verification and remittance procedure of offshore lending. Currently, domestic enterprises have achieved great success in their offshore investments. However, the difficulty in obtaining financing offshore and the short of floating capital have been the obstacle to the further developments of the offshore Chinese-funded enterprises. The issue of the Notice would encourage more Chinese enterprises with strong capital strength to “go abroad”, further facilitate investment and trading so as to stabilize the offshore demands and to deal with the international financial crisis in an effective way.

Contacts

For further information on the matters covered in this newsletter, please contact:

SHANGHAI OFFICE
Yun CHEN
King & Wood
28-30/F, Huai Hai Plaza
1045 Huai Hai Road (M)
Shanghai 200031
China
Tel: +86 21 2412 6052
Fax: +86 21 2412 6250/6251
Email: chenyun@kingandwood.com

BEIJING OFFICE
Ling WANG
King & Wood
40th Floor Office Tower A, Beijing Fortune Plaza
7 Dongsanhuan Zhonglu
Chaoyang District Beijing
China
Tel: +86 10 5878 5588
Fax: +86 10 5878 5599
Email: wangling@kingandwood.com

SHENZHEN OFFICE
Xueli CHENG
King & Wood
28th Floor, LANDMARK, 4028 Jintian Rd.
Futian District, Shenzhen 518026 China
Tel: +86 755 2216 3308
Fax: +86 755 2216 3380/3390
Email: chengxueli@kingandwood.com