Article by Elaine Lo (partner) and Hannah Ha (solicitor)


On 8 January 2003, Tentative Measures for the Administration of External Debts (the "Tentative Measures") were promulgated jointly by the State Development Planning Commission, the Ministry of Finance and the State Administration of Foreign Exchange ("SAFE"). The Tentative Measures will become effective on 1 March 2003.

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The purposes of the Tentative Measures are to strengthen the control of External Debts, to regulate the borrowing of External Debts, to improve the efficiency for the use of External Debts and to reduce the risk of borrowing External Debts.

"External Debts" is defined in the Tentative Measures as debts denominated in foreign currency owing or incurred by institutions within China ("Domestic Institutions") to non-residents ("Non-residents"). Although the terms "Domestic Institutions" and "Non-residents" are defined in Clauses 3 and 4 of the Tentative Measures respectively, the definitions are worded in unusual language, such as "institutions of usual establishment" and "institutions of unusual establishment" which need clarification. According to an official of the Capital Account Management Department of SAFE, foreign banks' branches and foreign-funded financial institutions inside Mainland China are not "Non-residents", but belong to the category of "Domestic Institutions".

"External Debts" are divided into three different types, viz. foreign government loans, international financial organisation loans and international commercial loans. Moreover, the contingent obligations to repay loans under security provided to "Non-residents" by "Domestic Institutions" will be treated as contingent External Debts and, therefore, come within the scope of application of the Tentative Measures.

Regarding foreign investment enterprises ("FIEs"), the amount of External Debts that can be borrowed by them has now been redefined. Previously, only the total amount of medium- and long- term loans borrowed by FIEs shall not exceed the difference between total investment and registered capital. Now, according to Clause 18 of the Tentative Measures, the aggregate of (i) the total outstanding amount of medium- and long- term External Debts owing by a FIE, and (ii) the short-term External Debt balance quota allocated to a FIE by SAFE, shall not exceed the difference between such FIE's total investment and registered capital.

The short-term loans borrowed by the Domestic Institutions shall mainly be used as working capital.

In fact, prior to the promulgation of the Tentative Measures, there were already rules and regulations governing or controlling the borrowing of some of the External Debts such as the Procedures for the Administration of Borrowing of International Commercial Loans by Domestic Institutions, Administration of the Provision of Security to Foreign Entities by Domestic Institutions inside China Procedures and its Implementation Rules, and the Provisional Regulations for the Statistics and Monitoring of External Debts (collectively referred to "Previous Regulations"). The Tentative Measures do not expressly repeal the Previous Regulations. However, inevitably, there are certain control measures provided in the Tentative Measures which are overlapping or even "in conflict" with some provisions of the Previous Regulations. Therefore, the extent to which the Tentative Measures would actually repeal or modify the operation of the Previous Regulations remains to be seen.

Furthermore, it seems that Tentative Measures are just a set of broad principles without much detail for implementation. For example, according to Clause 14 of the Tentative Measures, the medium- and long- term international commercial loans borrowed by the state-owned commercial banks will be controlled by the "management of outstanding balance". However, it is not clear what is "management of outstanding balance" and how it would be operated. According to Clause 17 of the Tentative Measures, borrowing of External Debts by foreign-funded financial institutions inside China will be governed by the "control of total amount". Again, what is the "total amount" and how will it be operated are not clear.

Therefore, unless and until these issues are clarified and further elaborated, the actual impact and operation of the Tentative Measures will remain unclear.

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