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New SAFE regulations expected to aid offshore bond financings

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On 1 June 2014, China’s State Administration of Foreign Exchange (the SAFE)’s Provisions on the Administration of Foreign Exchange for Cross-Border Security (跨境担保外汇管理规定) and the Administration of Foreign Exchange for Cross-Border Security Implementation Guidelines (跨境担保外汇管理操作指引) (together, the New Regulation) came into force. Consistent with China’s national policy of encouraging the “going abroad” of Chinese companies, the New Regulation supports the overseas investment activities of Chinese companies by facilitating offshore financings.

Among other changes, the New Regulation now allows PRC onshore banks and companies to guarantee, or provide other types of security in connection with, offshore bond offerings and other offshore financings without being subject to an annual quota or the need for approval by the SAFE, provided the banks meet certain conditions.

Traditionally, due to the lack of overseas assets and operational track records, Chinese companies encountered substantial difficulties in obtaining offshore loans or credit supports for their overseas operations or investments. Guarantees provided by the Chinese parent companies or domestic banks were generally helpful but they were not always available because of regulatory obstacles. The New Regulation has removed most of the regulatory obstacles, and therefore facilitates offshore financings and investments of Chinese investors. Although there are still enforceability concerns regarding Chinese outbound guarantees, the much simplified process of putting an outbound guarantee in place is likely to make Chinese outbound guarantees more acceptable to sophisticated foreign parties in Chinese outbound transactions.

Although the restrictions on foreign debts (i.e. quota or cap) have not been entirely removed, the New Regulation represents a significant step towards the deregulation of cross-border guarantees (a type of contingent debt) provided by or to Chinese entities, laying the foundation for further liberalisation of capital account transactions.