CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
Common Procedures All institutions must register with the PBOC’s credit reporting system and submit lending data on a regular basis. When providing financing to overseas entities, prior approval from the State Administration of Foreign Exchange (SAFE) is required, along with the acquisi- tion of a cross-border financing macroprudential man- agement quota. 3. Structuring and Documentation 3.1 Restrictions on Foreign Lenders Providing Loans China implements a “risk-controlled progressive openness” policy for foreign lenders, with three core regulatory mechanisms. • Prudential requirements: foreign banks must main- tain a 12.5% capital adequacy ratio (0.5% higher than domestic institutions) with parental liquidity guarantees. • Differentiated business management: retail RMB services require three years of operation plus two years of profitability, with a minimum deposit of RMB500,000 (USD69,000). Cross-border loans are subject to sector-specific caps: real estate firms face a debt limit of 1x net assets, while tech firms can enjoy 2.5x net assets. A 2025 fast track scheme is introduced for strategic industries, including renewables and semiconductors. • Data and compliance mandates: the Data Security Law mandates onshore data storage and cross- border transfers require cybersecurity reviews. Since 2024, foreign banks must use the PBOC credit system, and AML monitoring thresholds have been lowered to RMB500,000 (USD69,000). 3.2 Restrictions on Foreign Lenders Receiving Security Under PRC law, foreign lenders are not entirely unre- stricted in receiving security or guarantees, with the main restrictions and impediments relating to regula- tory requirements and procedural compliance in spe- cific areas. First, for cross-border guarantees, in accordance with the Administrative Provisions on Foreign Exchange
for Cross-border Guarantees, if a guarantee involves foreign exchange receipts and payments (eg, foreign guarantees for domestic loans, domestic guarantees for foreign loans), the foreign lender must ensure the foreign exchange registration for the guarantee trans- action is completed; failure to register may affect the enforcement of security rights. Second, in specific industries such as finance, real estate, and mineral resources, when foreign lenders accept relevant assets (eg, financial licenses, real estate rights, mining rights) as security, they must comply with special industry regulatory rules, and some assets may have restrictions on the qualifica- tion of entities for mortgage or pledge. Additionally, for guarantees, if the guarantor is a domestic non- financial enterprise, it must comply with China’s provi- sions on external guarantees, such as not providing external guarantees beyond a certain proportion of its net assets and fulfilling internal decision-making procedures (eg, shareholders’ meeting or board of directors’ resolutions). Finally, foreign exchange control policies may indi- rectly impede right enforcement; for example, when foreign exchange remittance is involved after the reali- sation of security interests, it must meet the foreign exchange authority’s verification requirements for for- eign exchange payment, which may increase both the time and compliance costs. 3.3 Restrictions and Controls on Foreign Currency Exchange The PRC foreign exchange management system operates under the principle of “risk prevention and targeted liberalisation.” Key regulatory points include the following. For individual foreign exchange man- agement, each person has an annual facilitation quota of USD50,000 for buying or settling foreign exchange, and any excess requires proof of legitimate purposes such as education or medical treatment. Funds are strictly prohibited from being used for overseas prop- erty purchases, securities investments, virtual curren- cies, or NFT transactions, and split transactions are placed on a “watch list” with a three-year restriction on related operations. For corporate capital flows, outbound direct investment (ODI) must be registered with the National Development and Reform Com-
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