CHINA Law and Practice Contributed by: John Wang, Xu Jun, Song Jia and Zhao Yuxuan, Wang Jing & Co
by commercial banks and other regulated financial institutions, and is widely used for vessel construc - tion and acquisition. Under a typical ship loan structure, the lender advanc - es funds directly to the shipowner as borrower, and the vessel is provided as collateral by way of a ship mortgage. Ship mortgages are recognised under Chi - nese law and must be duly registered with the com - petent MSA or other designated registry in order to be effective against third parties. Key terms and operative provisions of ship loan facili - ties commonly include loan and repayment schedules, financial covenants, use-of-funds and operational undertakings, default clauses and acceleration and enforcement provisions. Pure equity investment in vessels is not commonly regarded as a ship financing method in the Chinese context. Equity contributions are typically made for investment or capital structuring purposes, often through special purpose vehicles established to sup - port loan financing, rather than serving as an inde - pendent source of vessel finance. As a result, vessel acquisition and construction are, in practice, over - whelmingly funded through debt-based structures. Security Packages Other Than Mortgages While the ship mortgage remains the core security instrument in traditional loan structures, lenders and lessors in China commonly require additional secu - rity arrangements to enhance enforceability and credit protection. Depending on the transaction structure, these may include: • assignment of earnings or receivables, such as charter hire or freight, to secure repayment obliga - tions; • assignment of insurance proceeds, including hull and machinery and P&I insurance, in favour of the lender or lessor; • parent company or related-party guarantees, including the guarantee by the actual owner or controlling person of the ship, particularly where the borrower is a single-purpose entity; and
• account control or cash management arrange - ments, designed to monitor and prioritise debt or lease servicing. In practice, these elements are often combined into a comprehensive security package, reflecting a pref - erence for asset-based and structurally reinforced financing arrangements in the Chinese ship finance market. 2.2 Ship Leasing Ship finance leasing is another commonly adopted financing structure in China. Under a finance lease, a domestic finance leasing company acquires the ves - sel from the shipyard or seller and leases it to the operator under a long-term lease agreement with peri - odic rental payments. The legal relationship between the parties is governed primarily by the lease agree - ment, with the lessor retaining ownership of the vessel during the lease term. Ship finance leasing is applied to both new build and second-hand vessels. There has been an increase in the use of ship finance leasing in China’s ship finance practice. This develop - ment is partly attributable to the regulatory framework applicable to traditional bank lending, which is sub - ject to prudential supervision by the National Financial Regulatory Administration and typically involves rela - tively stringent borrower qualification, credit assess - ment and balance-sheet requirements. By contrast, ship finance leasing offers a more flexible structur - ing approach, allowing transactions to be tailored through ownership arrangements, rental structures and risk allocation mechanisms, while still achieving a financing effect. As a result, ship finance leasing has become an increasingly utilised financing channel alongside conventional bank loans. This shift is underpinned by a clear and mature legal framework. Under the PRC Civil Code, finance leas - ing is recognised as a distinct nominate contract, with statutory rules governing ownership, payment obliga - tions and remedies. The Supreme People’s Court’s judicial interpretation on finance lease disputes further reinforces the enforceability of core commercial fea - tures of finance leasing, including the lessor’s reten - tion of title, the lessee’s generally unconditional obli - gation to pay rent, and the lessor’s right to terminate
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