On June 15, 2012, the State Administration of Foreign Exchange (the "SAFE") issued the Circular on Relevant Foreign Exchange Issues Relating to Encouraging and Guiding the Healthy Development of Private Investment (the "2012 Circular"), which will become effective on July 1, 2012. The 2012 Circular aims to relax the foreign exchange control on outbound investment and to follow the principles of the Opinions on Encouraging and Guiding the Healthy Development of Private Investment promulgated by the State Council on May 7, 2010. The 2012 Circular facilitates the financing of offshore subsidiaries of Chinese companies by the following two measures.

1. Expansion of Sources of Loans from Chinese Parent Companies

The offshore subsidiaries of Chinese companies, in particular small and medium size companies, generally face difficulties of getting loans from foreign banks or financial institutions. For financing their activities abroad, they rely on the loans taken out from their onshore Chinese parent companies. However, before the effectiveness of the 2012 Circular, in accordance with the Circular Hui Fa (2009) No. 24, the Chinese parent companies were only allowed to use their self-owned foreign exchange funds, the foreign exchange funds converted from RMB or the funds from their foreign exchange cash pools to grant loans to their offshore subsidiaries. However, under the 2012 Circular, from July 1, 2012 the Chinese parent companies are also allowed to use the proceeds of their foreign exchange loans for loans to be granted to their offshore subsidiaries.

Upon application, the SAFE will grant a quota to each Chinese parent company for the loans to be granted to its offshore subsidiaries. After completion of the registration with the competent SAFE, the Chinese parent company may open a special account with its bank to disburse the loan to and receive the repayment of the loan from its offshore subsidiaries. The previous approval requirements in this regard are abolished by the 2012 Circular.

2. Permission of Chinese Individuals Acting as Co-Guarantor

In the past, a domestic individual was not allowed to provide security in favor of a foreign entity. However, under the 2012 Circular, a domestic individual may act as co-guarantor with a Chinese company to jointly provide guarantee, mortgage, pledge or other kind of securities as permitted by the PRC Security Law in favor of a foreign lender for the financing taken out by an offshore company invested by such Chinese company. In other words, for privately-owned companies, the foreign lender now can require the ultimate individual owner to provide security for the loan taken out by the offshore subsidiaries.

The domestic individual shall entrust the Chinese company which will jointly provide the security for its offshore subsidiary to apply to the competent SAFE for the approval and registration of the security in question. No substantive examination shall be conducted by the SAFE on the qualification of the concerned domestic individual, the security method or the scope of secured property so provided. When the security provided by the domestic individual is enforced, the SAFE will require the relevant evidence of performance of the debt for review.

The 2012 Circular increases the possibilities for the offshore subsidiaries of Chinese companies to obtain financing from foreign banks and financial institutions at abroad and from their parent companies in China. It is expected that the SAFE will issue detailed guidelines to further clarify the above-mentioned approval and registration procedures.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 29/06/2012.