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New foreign debt regime takes effect in China

The Chinese government has implemented a new set of foreign debt financing regulations, effective February 10, 2023, which supersede the governing instruments on foreign debt activities in effect since 2015.

The Administrative Measures for the Approval and Registration of Mid-to-Long Term Foreign Debt of Enterprises (New Measures) were implemented by the National Development and Reform Commission (NDRC), a department of the Chinese State Council in charge of formulating and implementing strategies on national economic and social development.

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The New Measures are the result of a month-long public consultation of a previous draft, the Administrative Measures for the Approval and Registration of Mid-to-Long Term Foreign Debt of Enterprises, published by the NDRC in 2022.

The New Measures replace the Circular on Promoting the Reform of the Administrative System on the Filings and Registrations of Foreign Debt of Enterprises (Circular 2044), one of the governing instruments of foreign debt activities in China since 2015.

The existing requirement that in China borrowers/issuers of foreign debts have to register their debts with the NDRC prior to drawdown/issuance and, within 10 business days of drawdown/issuance, report the details of the debts to the NDRC remains unchanged.

As in the Circular 2044, the New Measures are expected to continue to treat debts incurred or bonds issued in the China (Shanghai) Pilot Free Trade Zone as foreign debts for the purpose of determining whether registration with the NDRC is needed.

The New Measures are consistent with the existing regulatory practices in China. However, the new document clarifies doubts left by the prior regulatory regime and consolidates the NDRC’s earlier responses to some of its related questions available on its webpage, to minimize uncertainties.

There are a few differences in key provisions of the New Measures, compared to the Circular 2044.

According to the Circular 2044, the regulations apply to a Chinese entity, or a non-Chinese entity or branch controlled by a Chinese entity issues a variety of debt instruments outside of Mainland China with a maturity of more than one year, whether the bonds are denominated in Renminbi or another currency.

It is the same in the New Measures, but it also expressly apply to indirect borrowing of an entity (not necessarily controlled by a Chinese entity) having its main operating activities in Mainland China, as it indirectly issues offshore bonds or takes out offshore commercial loans through an offshore enterprise, and the issuance or borrowing is “based on” the equity interests, assets, revenues and other similar rights or interests of underlying Chinese entities.

Following the extension of the New Measures to indirect borrowing, registration with the NDRC of offshore debt instruments of (a) red-chip companies and (b) offshore enterprises controlled through non-Chinese variable interest entities by Chinese entities, becomes statutorily required.

The New Measures establish the following eligibility to incur foreign debts: legally incorporated and validly existing, business operations in compliance, and has a robust corporate structure that operates well, and has a reasonable demand for incurring foreign debts, compliant use of proceeds, has the competence in meeting debt obligations, and has robust foreign debt risk management policies.

For the most recent three years, both the borrowers/issuers and their controlling shareholders and beneficial owners have not been convicted of corruption, bribery, asset misappropriation or embezzlement, or disorder in the socialist market economy, and have not been lawfully investigated for engaging in criminal behavior or material breach of laws and regulations.

Unlike Circular 2044, the New Measures stop short of expressly requiring borrowers/issuers in China wishing to incur additional foreign debts to ensure that their existing bonds and debts are not in default.

A Chinese borrower/issuer who remains solvent but who is otherwise not allowed to raise foreign debt capital because it has defaulted on a limited number of repayment obligations, will become able to do so. The New Measures afford Chinese borrowers/issuers greater flexibility in refinancing their existing debt obligations.

The debt instruments covered by the New Measures include senior debts, perpetual securities, capital debts, mid-term notes, convertible bonds, exchangeable bonds, financial leases, commercial loans and do not cover preferred stocks.

Coupled with express references to a wide variety of debt instruments in the New Measures, whether the debts or bonds are incurred or issued in the China (Shanghai) Pilot Free Trade Zone, Hong Kong, Macau, or any non-Chinese jurisdictions, it is expected that more debt instruments will come under the umbrella of the New Measures.

Use of proceeds is expressly required to align with that stated in the Review and Registration Certificate of Incurrence of Corporate Foreign Debt (New Certificate) issued by the NDRC prior to the incurrence of the foreign debt, and the proceeds should not be appropriated for any other purpose.

The New Measures propose a positive list and a negative list – one setting out encouraged usages of foreign debts, and the other setting out prohibited usages of foreign debts.

Use of proceeds of foreign debts to support the following is encouraged: major industries; and implementation of national major strategies and development of the real economy.

Use of proceeds of foreign debts ought not to: violate laws and regulations; threaten or adversely affect the national interests and economic security, be contrary to the macro-economic control targets; contravene development planning and industrial policies; and be used to cover losses, incur non-productive expenditures and, except for borrowers/issuers which are financial institutions, on-lend to third parties.

In addition, the New Measures establish that proceeds also ought not to threaten or adversely affect the information and data security of China, increase hidden debts of local governments; and be used to speculate.

Further, certain restrictions have been relaxed: the restrictions against using proceeds of foreign debts to cover losses and incur non-productive expenditures have been removed; and borrowers/issuers which are not financial institutions may on-lend their proceeds of foreign debts to third parties, if the intention to do so is set forth in the application materials submitted to the NDRC and the NDRC gives its approval.

With the removal of these restrictions, the New Measures appear to allow for an expansive use of proceeds by eligible borrowers/issuers.

In addition, under the new regime the management of foreign debt by way of "approval and registration" replaces the "filing and registration" regime implemented under Circular 2044.

Such change may mean that applications for approval of medium and long-term foreign debt may be subject to substantive review and increased oversight by government bodies.

The NDRC will notify the borrowers/issuers in the next five business days whether it accepts the registration or if the documents are incomplete, the registration is non-compliant, or the debt instruments concerned are outside the jurisdiction of the NDRC.

The New Measures state that only after obtaining from the NDRC a New Certificate, can the borrowers/issuers proceed to register their foreign debts with the State Administration of Foreign Exchange of the State Council of the People’s Republic of China (SAFE), open bank accounts, receive, exchange, and use the proceeds of foreign debts.

The NDRC is expected to issue the New Certificate within three months after deciding that it accepts the registration, and the New Certificate will be valid for a year.

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As the borrowers’/issuers’ actual use of proceeds need to be consistent with that stated in the New Certificate, and the NDRC may take up to three months to issue the New Certificate and may raise queries to ensure the integrity of the debt capital raising process, potential borrowers/issuers should reach out to the NDRC sooner rather than later.

After accepting the registration, the NDRC may by written notice require the borrowers/issuers or the intermediaries to provide supplemental materials or respond to enquiries. The time taken for such enquiries and responses will not count towards the three-month period required to issue the New Certificate.

The New Measures provide officials with measures and disciplinary actions applicable in case of violations, ranging from mandatory interviews with authorities, to public warning and revocation of the New Certificate. These measures can be applied towards not only the borrowers/issuers, but also their senior management, as well as the intermediaries.

The New Measures do not set forth any transitional provisions. As such, there are scenarios that may not be conclusively settled under the New Measures, including whether any foreign debts incurred or foreign bonds issued before, but which remain outstanding after, February 10, 2023, are subject to the provisions of Circular 2044 or the New Measures.

Similarly, whether any unutilized foreign debt quota which will otherwise only expire on a date later than February 10, 2023, will expire on that date because of the inauguration of the New Measures, unless a New Certificate is obtained to replace the 2044 Certificate.

It remains to be seen how the New Measures will be applied in practice, and borrowers/issuers are encouraged to seek early consultations with the NDRC should clarifications be required.


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