(By You Yunting and Wang Ting) The Chinese government imposes very strict regulations in regard to guarantees in foreign funds for domestic companies. Overseas companies or institutions, whether acting as a guarantor or a guaranteed person, must perform these registration procedures. Today we would like to introduce how domestic companies perform these registration procedures when overseas companies attempt to provide guarantees for domestic loans.
When overseas companies, in accordance with relevant regulations regarding loans to domestic finance organizations, offer loans to aforesaid finance organizations, these domestic groups can accept such loans and guarantees from both individuals and organizations outside China’s border. Such services provided by individuals and organizations in foreign jurisdictions can support the development of domestic companies, as well as exert positive effects on the investment of enterprise fixed assets and requirements of liquid capital.
I. Legal Basis
As previously stated, China enforces very strict regulations regarding overseas’ guarantees; there are several pieces of legislation relating to the domestic loans under foreign guarantees, among which include the Security Law, the Administrative Regulations on Foreign Exchange, the Administrative Measures for Foreign Guaranty by Domestic Institutions (the People’s Bank of China  No. 302), and the Circular of the State Administration of Foreign Exchange on Distributing the Administrative Measures for Registration of Foreign Debts (the State Administration of Foreign Exchange  No. 19). In addition, domestic companies, when applying for loans from financial institutions, if such are related to an overseas guarantee, shall additionally file an application for approval of such with the State Administration of Foreign Exchange (the “SAFE”).
II. Qualifications for Domestic Enterprises
In China, not all domestic enterprises may receive overseas guarantees. As mentioned above, very strict regulations on overseas guarantees are evidenced in the qualifications that domestic enterprises wishing to receive overseas guarantees shall have.
According to China’s relevant laws and regulations, a qualified domestic enterprise shall, acting as the role of a borrower, firstly, be a foreign-funded company, or a China-invested enterprise which receives a volume of domestic loans under an overseas guarantee from a SAFE branch. In addition, a qualified borrower must also satisfy the following requirements: (a) being in an industry encouraged by State policy; (b) having been consistently profitable over the past three years, or having a trend of proving good business operating trends; (c) having a comprehensive financial management system and internal control system in place; (d) net assets not less than fifteen percent of its total assets; and (e) the total amount of external loans and external guarantee balance shall not be more than fifty percent of its net assets.
1. Foreign-Funded Enterprises
When all required conditions are satisfied, if a domestic enterprise is a foreign-funded company, it may directly enter into contracts of guarantee with overseas guarantors, or with overseas creditors. Where there is performance under contract of an overseas guarantee, the volume of performed guarantees will be under scale management of external debts by the foreign-funded company.
2. Chinese-Invested Enterprises
If a domestic enterprise is a Chinese-invested enterprise with the approval of a SAFE branch, it must apply in advance for a loan volume for the domestic loans under overseas guarantees with its local administration of foreign exchange. A Chinese-invested company may enter into contracts for overseas guarantees under the permitted volume stated by the administration of foreign exchange.
When a Chinese-invested enterprise applies for foreign guarantees, any of the following review documents must be submitted: (a) its application; and (b) its business license; and (c) an audited financial statements of the prior year; and (e) a letter of intent for domestic loans accepting overseas guarantees; and (f) supplementary instructions that shall be filed regarding to aforesaid documentations.
III. Qualifications for Overseas Companies
Pursuant to the relevant laws and regulations, either an overseas institution or individual may act as a qualified guarantor. Of course, this is a prerequisite. When financing institutions accept an overseas guarantee, a number of comprehensive factors may be taken into consideration. The procedures may be as follows: first, oversea institutions should apply for financing letters of guarantee with an overseas financing institution; then, the overseas institutions must carry out the relevant procedures for overseas funds or credit line applications; afterwards, an offshore financing center shall issue a financing letter of guarantee to its domestic branch; and finally, after its domestic branch approval, an RMB loan will be extended to the domestic enterprise.
The forms of guarantee provided shall be guarantees, mortgages and pledges.
IV. Registration for Domestic Financing Institutions
Where domestic financing institutions conduct such overseas guarantees and provide a business service in domestic loans, with regard to domestic financing institutions, our regulations apply to the centralized registration system. In addition, domestic financing institutions must submit relevant documentation and materials to the local administration of foreign exchange. In cases where financing institutions and domestic enterprises hardly fall within the scope of an administration’s jurisdiction, all documentation and materials must be submitted to both administrations of foreign exchange.
At the same time, with China’s gradual opening up to foreign institutions, administrations of foreign exchange are attempting to weaken supervision of the overseas guarantee business, thereby optimizing the development and financing of domestic enterprises.