SECTION 1: Market overview
1.1 Please provide an overview of the cross-border
financing market in your jurisdiction.
Due to its foreign exchange control rules and
non-availability of competitive finance products, Mainland
China is clearly not a jurisdiction a non-Chinese company would
normally look at for raising funds. However, it is where most
financing for Chinese companies' overseas construction or
project finance projects (the overseas construction financing
sector), and Chinese companies' overseas investment (the
overseas investment financing sector) are negotiated and
The overseas construction financing sector is dominated by
Chinese banks. There are two basic financing structures. First,
buyer's credit, where a Chinese contractor brings Chinese banks
to its overseas employer and the overseas employer borrows from
the Chinese banks to pay the Chinese contractor for its work.
Second, seller's credit, where a Chinese contractor borrows
from Chinese banks to finance its work, so that the overseas
employer may defer its payment for the Chinese contractor's
work for a longer period. Buyer's credit is more often granted
based on an overseas employer's creditability and financial
capacity, while seller's credit is based more on a Chinese
contractor's creditability and capacity. In both structures,
sufficient security needs to be taken from the overseas
employer and insurance from Sinosure will be required.
By comparison, the financing demands, lenders and financing
structures in the overseas investment financing sector are
diversified. In addition to local Chinese banks, which are the
conventional lenders, international banks, other financial
institutions (such as trust and securities houses) and private
equity funds actively provide financing. In general, in this
sector banks will provide senior debt, such as a normal
corporate loan, while other financing institutions and private
equity funds are more flexible. In addition to senior debt,
banks will also consider subordinated loans and even equity
financing. As one can usually expect, the cost of subordinated
loans and equity financing is usually high.
Another very important difference between the two sectors is
the application of different foreign exchange control rules.
The ultimate use of the loans in the overseas construction
financing sector is mainly trading payments, which are not
restricted under Chinese foreign exchange rules. The ultimate
use of financing in the overseas investment financing sector is
overseas investment, which is subject to prior regulatory
control by Chinese authorities. Consequently, one does not need
to worry about foreign exchange control issues when designing
an overseas construction financing, while foreign exchange
control is one of the key issues that must be properly dealt
with when designing an overseas investment financing. An
overseas investment financing can easily fall apart because of
foreign exchange control constraints.
1.2 What have been the key trends or developments in
cross-border financing in your jurisdiction over the past 12
In the overseas construction financing sector, the seller's
credit structure has started to become popular.
From November 2016, the government tightened its regulatory
control regarding Chinese overseas investment. Bank loans
cannot be drawn down until the regulatory approvals for the
overseas investment are granted. Since the timing for obtaining
regulatory approvals is much longer than the deal closing
schedule expected by overseas sellers, this has given rise to
fast-increasing demands for bridge financing from an overseas
jurisdiction; these do not require PRC security (if PRC
security is required, the same regulatory control will
1.3 Have there been interesting changes in the structure of
the banking sector in your jurisdiction?
As far as cross-border financing is concerned, we have not
noticed any interesting changes.
SECTION 2: Financing structures
2.1 Briefly outline some recent notable transactions
involving your jurisdiction, highlighting any interesting
aspects in their structures and what they might mean for the
In the second half of 2016, China Nonferrous Metal
Industry's Foreign Engineering and Construction Co Ltd entered
into a seller's credit financing for its EPC construction
project in the Democratic Republic of the Congo. In the
financing structure, the employer's EPC payment obligation was
deferred by way of issuing payment orders and these payment
orders were assigned to banks for the purpose of obtaining
financing. This is an innovative structure created for overseas
construction financing and may soon become popular on the
market, since it is one of the few structures workable for
employers, contractors and lenders at the same time as being
acceptable to Sinosure.
2.2 Have there been any significant developments in the way
cross-border financing transactions are structured or in the
way borrowers and/or lenders are participating in the
For a Chinese company's overseas investment/acquisition, a
typical financing structure is overseas lending secured by
Chinese guarantee, which means that a Chinese buyer provides
satisfactory security to a PRC bank, the PRC bank provides bank
guarantee to an overseas bank, then the overseas bank extends
loans to the overseas subsidiary of the Chinese buyer.
Before November 2016, overseas lending secured by Chinese
guarantee was only subject to quotas (i.e. an overall amount of
bank guarantee that a Chinese bank can provide to overseas
banks) assigned to banks; this meant a Chinese bank could lend
through such a structure as long as it has quotas.
From November 2016, the government tightened its regulatory
control regarding Chinese overseas investment. On the one hand,
a Chinese company's overseas investment/acquisition will be
subject to stricter and more time-consuming prior review by the
relevant government authorities (outbound investment approval).
On the other hand, if the purpose of the loan is to finance a
Chinese company's overseas investment/acquisition, Chinese
banks can no longer extend overseas loans secured by a Chinese
guarantee until the outbound investment approval is
In overseas acquisitions, sellers usually expect to close a
deal in a short period, but this schedule can hardly be met by
Chinese buyers due to the length of time required to obtain
outbound investment approval. As such, the buyer must resort to
short-term bridge financing to close a transaction before the
outbound investment approval is obtained and the standard
overseas lending secured by Chinese guarantee from banks is in
place. Since short-term bridge financing does not have to be
secured by Chinese entities and the bridge financing provider
requires a certain level of equity contribution to the borrower
to subordinate the bridge financing, the financing often needs
to be accompanied by third party equity investments made with
funds readily available outside the PRC. As the risk exposure
of the bridge financing is usually not acceptable to commercial
banks, bridge financing is often provided by non-bank financial
institutions or private equity funds.
SECTION 3: Legislation and policy
3.1 Describe the key legislation and regulatory bodies that
govern cross-border financing in your jurisdiction.
The key regulatory bodies are the China Banking Regulatory
Commission, which is in charge of banking activities and the
State Administration of Foreign Exchange, which is in charge of
foreign exchange control.
3.2 Have there been any recent changes to regulations or
regulators that may impact the cross-border financing market
and what impact do you expect them to have?
See the information provided under 2.2 above.
3.3 Are there any rules, legislation or policy frameworks
under discussion that may impact lenders or borrowers involved
in cross-border financing in your jurisdiction?
We are not aware of any such discussions.
SECTION 4: Market idiosyncrasies
4.1 Please describe any common mistakes or misconceptions
that exist about the financing market in your
In an overseas lending secured by Chinese guarantee
structure, the Chinese company will first provide a security to
a Chinese bank (first security), the Chinese bank will then
provide a bank guarantee to an overseas bank (second security)
and finally the overseas bank will extend the loan to the
overseas subsidiary of the Chinese company. The second security
provided under this structure is subject to registration with
the PRC foreign exchange authority. Most people often
mistakenly assume the first security as the one subject to the
4.2 Are there frequently asked questions or often
overlooked areas from parties involved in cross-border
financings in your jurisdiction?
In the overseas construction financing sector, the most
frequently asked question is whether the debt is insurable by
In the overseas investment financing sector, the most
frequently asked question is whether the overseas investment
financing is workable in light of the overseas investment
4.3 Are there any classes of assets over which security
cannot be taken or regulations specific to your jurisdiction
governing the taking of security over certain classes of assets
that lenders should be aware of?
In the PRC there are certain assets where security cannot be
taken over, these include the following assets:
- ownership of land;
- the land-use right to the
collectively-owned land owned (subject to a few
- educational facilities, medical and health
facilities of schools, kindergartens, hospitals and other
institutions or public organizations established in the
interest of the public and other facilities in the service of
- property in relation to which the
ownership or the right of use is unknown or disputed;
- property sealed up, distrained or placed
under surveillance in accordance with law; or
- other property that may not be mortgaged
as prescribed by law.
4.4 What measures should be taken to best prepare for your
The non-recourse project finance concept is rarely accepted
by Chinese lenders. Chinese lenders always ask for sufficient
Change of foreign exchange control policies will
significantly impact on the workability of a cross-border
financing deal. Such change needs to be closely monitored.
SECTION 5: Practical considerations
5.1 Briefly explain the downstream, upstream and
cross-stream guarantees available in your jurisdiction, with
reference to any specific restrictions or limitations.
A Chinese company can provide cross-border guarantee only
for overseas entities in which it has direct or indirect equity
Security provided by overseas entities works only for local
Chinese loans made by financing institutions. In other words,
local Chinese loans made by other lenders cannot take security
provided by overseas entities.
5.2 Are there any specific issues creditors should be
mindful of regarding a bankruptcy and restructuring
Enforcement of security over assets located in the PRC is
lengthy and difficult.
5.3 Do foreign debt quotas apply in your jurisdiction and
is offshore financing to domestic entities monitored?
The PRC applies foreign debt quotas and closely monitors
offshore financing to domestic entities. As per the latest
policy issued in 2017, the total balance of offshore borrowing
that a domestic company can raise is limited to two times its
5.4 Describe your jurisdiction's relationship with
non-performing loans (NPLs), including volume of outstanding
NPLs and techniques/challenges in managing them.
In the past, when dealing with NPLs, commercial banks have
usually written-off or assigned the NPLs. Write-offs are often
difficult to implement on a large scale because of various
constraints, such as the state-owned assets management rule,
finance and tax regulations. NPLs were also sometimes sold to
an asset management company. Without a large-scale equity
financing, the asset management companies could not take NPLs
on a large scale. To deal with those issues, some commercial
banks have started to dispose NPLs through asset
securitisation. Recently, commercial banks were encouraged to
swap debt for equity.
SECTION 6: Outlook
6.1 What are your predictions for the next 12 months for
cross-border financing in your jurisdiction? How do you expect
legal practice to respond?
The government's control on overseas investment/acquisition
will continue but will relax to a certain extent. Legal
advisors need to closely follow the changes and propose
appropriate structures in light of the changes.
Partner, Jia Yuan Law Offices
T: +86 10 66413377
F: +86 10 66412855
Liu Yue is a partner in Jia Yuan Law Offices and
leads the international practice. With more than 16
years of cross-border experience, Liu Yue's practice
focuses on advising Chinese and foreign clients on a
broad range of matters including foreign direct
investment/M&A, outbound investment, project
finance/infrastructure concession and construction. In
the past few years, Liu Yue has advised on numerous
cross-border transactions, both from an
investment/project perspective and a financing
perspective. These include Midea's acquisition of Kuka
and NFC's EPC and financing for the Congo RTR