Legal development

From filing to approval China to enhance supervision of incurrence of foreign debt

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    The existing filing and reporting system for foreign debt imposed by Circular 2044 has been in place in the People's Republic of China since September 2015. Circular 2044 will be replaced by the new measures for the review and registration of mid- to long-term foreign debt recently published by the National Development and Reform Commission.  

    The existing regime and its impact on the cross-border financing market

    A filing and reporting system was imposed in September 2015 by the NDRC Circular on Promoting the Reform of the Administration on the Filing and Registration System for Foreign Debts Issued by Enterprises (commonly referred to as Circular 2044). Under Circular 2044, enterprises incorporated in the People's Republic of China (PRC) and their offshore subsidiaries and branches are required to submit a pre-issuance filing to the National Development and Reform Commission (NDRC) for foreign debt with a tenor of more than one year and obtain a registration certificate prior to the first drawdown or closing. 

    The filing regime under Circular 2044 was seen to be a relaxation of the previous case-by-case approval requirement. With details on the scope of application and certain administrative matters clarified in subsequent guidelines and notices, the Circular 2044 requirements have resulted in an established practice of consulting and, where required, registration with the NDRC prior to issuance of in-scope (or potentially in-scope) foreign debt. Parties are generally aware of and would factor in the timeline for granting the certificate (stipulated to take 7 business days in Circular 2044 but may vary in practice) in deal timetables and include it as a documentary requirement.

    The new measures – what's changing now? 

    The new measures for the review and registration of mid- to long-term foreign debt of enterprises (Measures) proposed by the NDRC in late August made the following key changes to the current regime:

    • the Measures describe the process as "review and registration" which may imply that a more substantive review may take place and an approval is now required;
    • a 3-month period has been specified for issuance of the registration certificate with explicit provisions that enterprises can only commence foreign exchange registration, account opening and withdrawal of fund procedures after obtaining (and relevant authorities and financial institutions should not handle such procedures for in-scope enterprises without) the certificate;
    • the Measures explicitly bring into scope indirect foreign borrowing by enterprises having main business onshore through entities registered abroad on the basis of shares, assets, earnings or other similar interests of onshore enterprises (such as red-chip enterprises); and
    • the Measures impose obligations on intermediaries (such as professional advisors, agents and arrangers in debt transactions) and provide for consequences of non-compliance. 

    Impact of proposed changes

    • De facto approval? Although the process of granting a registration certificate under the existing regime involves a certain degree of assessment by the NDRC, the emphasis on "review" in the new Measures may be taken as potentially tightening the scrutiny of foreign debt and requiring an approval. This, together with the new eligibility criteria to be met by the borrowing entity (such as having reasonable need for foreign funds and the enterprise and its shareholders having good conduct and compliance record over the last three years) are seen to have strengthened the regulator's oversight and management of foreign debt.
    • Timeline: Setting a 3-month review and certificate issuance period may bring certainty to transaction timelines but may create practical difficulties to the actual execution process. Although the draft Measures have refined the filing and acceptance/rejection process by specifying the information required and the response time, the form of application and list of accompanying documents have yet to be published. With the longer review period and the restrictions on authorities and financial institutions stipulated, parties may need to build into the deal structure (for example by having a longer availability period for loans) the time required for issuance of the certificate and other closing procedures. In particular, the existing practice of submitting foreign exchange registration and making arrangements for transmission of funds concurrently with the NDRC registration process may no longer be viable or permitted.
    • Scope of application: Although the Measures are expressed to apply to indirect borrowing by PRC enterprises in the name of offshore entities (which may not be "controlled" by and hence are not considered a subsidiary of the PRC enterprise), the test of main business and the connection with the onshore entity that will trigger the requirement are not defined. It is hoped that further clarification will be provided on how these will be construed to avoid uncertainty and inconsistency when being applied. 
    • Penalties: Penalties for contravention of Circular 2044 (such as issuance of foreign debt without completing the filing) include issuance of warnings, announcement of misconduct and suspension of participation in offshore debt related-activities by the onshore enterprise and certain intermediaries. In the new Measures, the categories of violations have been expanded to include omissions and misleading or false statements in application, disclosure and other issued documents and obtaining the registration certificate by improper means (the latter resulting in the certificate being revoked). For intermediaries, relevant supervisory bodies will be notified and penalties may be imposed. It remains to be seen whether this will subject intermediaries to greater responsibility (for instance in relation to due diligence required) and what (and how) disciplinary actions will be taken. 

    A table summarising other changes and clarifications set out in the proposed Measures is annexed to this article.

    The proposed Measures are open for public comment until 26 September 2022 and we will continue to monitor the latest developments. Please feel free to get in touch with the team below or your usual Ashurst contact if you wish to further discuss the new requirements.


    The table below summarises other key areas where modifications or clarifications have been made to the existing rules.

    arearequirements and clarifications
    Scope of application

    The meaning of "control" in defining the offshore enterprises and branches that will be captured has been clarified.

    The Measures are expressed to apply to both financial and non-financial enterprises.

    The scope of debt instruments expressly refer to medium term notes and other instruments (such as convertible bonds and perpetual bonds) that were previously included in the NDRC Q&A relating to the Circular 2044 (Q&A).

    Use of proceeds

    In line with the Q&A, the draft Measures provide that enterprises can make their own decisions on use of funds but set out certain conditions that have to be met (for example, not to be used in violation of PRC laws and regulations or in contradiction with national interests and policies).

    Use of proceeds to make-up for losses or speculative activities and on-lending (other than by financial enterprise borrowers) is prohibited.

    Post-issuance reporting

    In addition to the existing post-issuance reporting requirements, enterprises are required under the draft Measures to:

    • report on the status of the foreign debt, within 10 business days after the expiry of the registration certificate;
    • report on use of funds, principal and interest payment arrangements and main operating indicators, within 5 business days prior to the end of January and July each year; and
    • promptly report on any risks in relation to debt repayment or major restructuring which may affect performance of debt obligations.

    The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
    Readers should take legal advice before applying it to specific issues or transactions.


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