SECTION 1: MARKET OVERVIEW
1.1 Please provide an overview of the market and
environment for cross-border financing in your
Due to its foreign exchange control rules and the
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 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 What have been the key trends or developments in your
jurisdiction over the past 12 months in terms of financing
structures, deal drivers and the way borrowers and creditors
are participating in the market?
In the overseas construction financing sector, the seller's
credit structure has started to become popular.
Compared with 2017, the regulatory control regarding Chinese
overseas investment is relaxed but still pretty burdensome.
Bank loans cannot be drawn down until the regulatory approvals
for the overseas investment are granted. The timing for
obtaining regulatory approvals is often 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
At present, no other significant developments have taken
place in 2018. As such, the following developments still
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 (ie 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.
2.2 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 2017, Zhonghong Stocks Holdings
Company Limited (Zhonghong Stocks), through its overseas
subsidiary Yanzhao Global Limited (Yanzhao Global),
contemplated the acquisition of a 90.5% equity interest of
Abercrombie & Kent Group of Companies (A&K).
Considering that the PRC tightened its control on the outflow
of foreign exchange, Zhonghong Stocks designed the following
overseas bridge financing structure allowing Yanzhao Global to
meet the tight timing requirement for closing: Massive Reward,
the subsidiary of China Huarong Asset Management Co, subscribed
the new shares issued by Yanzhao Global; and Forest Asset, the
subsidiary of private equity firm RPJ, provided a loan to
Yanzhao Global which funded the bridge financing for Yanzhao
Global to pay the share purchase price.
This is a typical financing structure one may want to
explore when it takes too long to complete PRC regulatory
approvals to meet the closing deadline.
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 legislation or
regulations that may impact the cross-border financing market
or availability of funding in your jurisdiction?
See Section 2.1.
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? How can market participants prepare?
We are not aware of such discussion.
SECTION 4: LOCAL MARKET NORMS
4.1 Are there frequently asked questions from new market
entrants 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
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 will be limited to two times
its net assets.
4.2 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
4.3 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:
- land ownership;
- land-use right to collectively-owned land
(subject to a few exceptions);
- educational facilities, medical and health facilities
belonging to schools, kindergartens, hospitals and other
institutions or public organisations 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 that is sealed up, distrained or
placed under legal surveillance; and
- other property that may not be mortgaged
as prescribed by law.
4.4 What measures should be taken to best prepare for your
local market norms?
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 LEGAL CONSIDERATIONS
5.1 Briefly explain (i) the typical security package
available at closing and (ii) any downstream, upstream and
cross-stream guarantees available in your jurisdiction, in each
case, with reference to any specific restrictions or
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 or challenges creditors
should be mindful of regarding an insolvency or restructuring
situation? Have there been any major judicial changes to the
insolvency system (or related judicial decisions) in your
jurisdiction recently? How long does an enforcement process
In an insolvency or restructuring situation, the key
challenges that creditors often have to face are issues with
efficiency in procedures and enforcement. It will normally take
years to close an insolvency process and the related
Recently, there has not been any major judicial changes to
the insolvency system. The process of court enforcement in the
PRC is lengthy and difficult, and it is not unusual for it to
take more than one or two years to complete a court
SECTION 6: OUTLOOK
6.1 What are your market outlook predictions for the next
12 months in cross-border financing in your jurisdiction?
The government's tight control on overseas investments and
acquisitions will continue until the trade conflicts between
China and US are resolved. Legal advisers 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'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 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