Most Read Contributor in Hong Kong, September 2016
Article by Elaine Lo (partner) and Hannah Ha
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.
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
"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.
The original email legal update is copyright Johnson
Stokes & Master at the date written first above. All rights
reserved. This publication provides information and comments on
legal issues and developments of interest to our clients and
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the subject matter and is not intended to provide legal advice or a
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