This content is from: Features

2017 Project Finance Report: China

Jihong Wang, Zhong Lun Law Firm

www.zhonglun.com

Section 1. National update

1.1 What are the main project finance trends and developments (for example, increased use of project bonds) recently seen in your jurisdiction?

The current main project financing trend in China is the widespread promotion of public-private partnerships (PPP) within the infrastructure sector, as well as utilisation by PPP projects of various private investment methods such as industrial investment funds, private equity funds, introduction of strategic investors and financial leasing.

Section 2. ECAs and Multilaterals

2.1 What role have export credit agencies, multilateral agencies and international financial institutions played in supporting project finance transactions in your jurisdiction? Please include an overview of the main institutions domiciled in your jurisdiction.

Related institutions such as credit agencies, multilateral agencies and financial institutions primarily support Chinese company participation in project financing through providing security, credit and financing. The Asian Infrastructure Investment Bank is the main institution providing financial support for infrastructure projects in Asia, while the China Export & Credit Insurance Corporation (Sinosure) provides insurance to Chinese companies financing outbound projects.

Section 3. Public-private partnerships

3.1 Is there a public-private partnership (PPP) act or similar statute authorising PPPs, and are both greenfield and brownfield PPP projects permitted?

China at present does not have a national PPP law. Over the past several years, relevant government institutions including the Ministry of Finance and National Development and Reform Commission (NDRC) have issued a series of policies and normative documents on PPP projects. However, grey areas exist for PPP projects due to the relatively low role of normative documents within the legal hierarchy and conflicts with related systems such as for land, guarantees and government procurement.

3.2 May a concessionaire grant security interest in the project to its lenders and, if so, is consent of the government or contracting authority required?

Yes. However, government or contracting authority consent is often required.

Section 4. Foreign investment and ownership restrictions

4.1 What restrictions, fees and taxes exist on foreign investment in or ownership of a project?

Pursuant to the Catalogue for the Guidance of Foreign Investment Industries jointly issued by the NDRC and Ministry of Commerce, foreign investment projects may be divided into four categories: encouraged, allowed, restricted and prohibited. The Catalogue lists industries that foreigners are prohibited from investing in and holding rights for as well as industries for which restrictions are imposed on foreign participation, such as requiring a Sino-foreign joint-venture or not allowing foreign equity ownership under specific circumstances.

Regarding taxes and fees, local Chinese entities of foreign companies currently enjoy the same treatment as other domestic companies and, in some industries, may also benefit from customs and import VAT exemptions. It is worth noting that to encourage foreign investment, starting from October 8 2016, foreign-invested company establishment procedures were greatly simplified from an examination and approval system to a filing system.

4.2 Can a government authority block or unwind a transaction involving foreign investors after it has closed for strategic, national security or other reasons?

Yes. For example, the Ministry of Commerce can, on the grounds of national economic security, require the termination of a transaction or removal of the threat to national economic security through methods such as transferring related equity or assets.

Section 5. Foreign exchange, remittances and repatriation

5.1 What, if any, are the restrictions, controls, fees and taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?

China exercises a strict foreign exchange policy. However, there are no restrictions on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties outside China if the investors and invested companies are in compliance with Chinese law. Companies can go to designated banks to process remittances provided that they submit documentation as required by the bank. For example, for profits, a bank would require a board resolution on profit distribution, a tax clearance certificate and an audit report. Banks charge fees for processing remittances.

5.2 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?

Yes. Chinese project companies can establish and maintain onshore foreign currency accounts without prior approval from the foreign exchange authority. However, opening an offshore account in other jurisdictions would require prior foreign exchange authority approval.

Section 6. Insurance

6.1 Are there any restrictions, controls, fees or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?

Foreign insurance companies must obtain prior authorisations from the China Insurance Regulatory Commission (CIRC) to legally provide or guarantee policies in China. Insurance policies for project assets located in China are generally subject to CIRC control unless the insured has obtained policies outside of China under specific conditions.

6.2 Is reinsurance in the international market commonly seen on project finance transactions in your jurisdiction and are cut-through clauses permitted?

Sensu stricto project finance (where financing of a project is entirely guaranteed by its revenue) is rare in China. Insurance companies that have provided policies for project finance transactions commonly seek reinsurance. Cut-through clauses are prohibited under Chinese law.

Section 7. Choice of law and jurisdiction

7.1 Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?

Submission to a foreign jurisdiction is permitted when there is a foreign element. However, choice of jurisdiction is limited to: the residence of the defendant, where the contract is implemented or executed, where the object of the contract is located, or a place related to the dispute. However, related laws stipulate certain contracts for which Chinese law must apply, such as a joint-venture or labour contract.

Chinese law does not expressly provide for the effectiveness and enforceability of a waiver of immunity. There also has not been any precedent case that renders a clear conclusion on this matter.

7.2 Is English or New York law recognised as a valid choice of law in your jurisdiction?

The parties may freely choose the governing law (including English or New York law) if the contract has a foreign element, even if the chosen governing law is not related at all to the disputed contract, with the exception of mandatory application of Chinese law for certain contracts (such as joint venture or labour contracts).

7.3 Would courts recognise a foreign arbitral tribunal award or court judgment? If so, what are the conditions applicable to such recognition?

Foreign arbitral awards are well-recognised by Chinese courts and cannot be overturned except for on procedural and public interest grounds. Foreign court judgments, on the other hand, are subject to stricter scrutiny (including whether the judgment is against Chinese law principles), and can be recognised only if the country where the judgment is rendered and China have signed a bilateral or multilateral agreement, convention, etc. or have 'mutually beneficial relations'.

Section 8. Security

8.1 What types of security are usually seen in project finance transactions in your jurisdiction, and are there any notable exclusions, including assets which cannot be secured?

Types of security include mortgages (such as on the land, house and minerals), share pledges, receivable pledges and guarantor joint liability. Assets that cannot be securitised include: assets involved in a dispute or where ownership and use rights are unknown; assets that have been frozen, seized or are under supervision; public and non-government institution educational facilities, medical and public health facilities and other facilities for the public benefit; land ownership rights, residential possession rights for rural collective land, etc.; and public institutions such as national government institutions, schools, child care centres, hospitals, etc. as well as branches and departments of non-government institutions and businesses cannot be guarantors.

8.2 Would the law of your jurisdiction enforce arrangements whereby debt is subordinated by way of a contractual agreement (including in bankruptcy or insolvency proceedings)?

Yes.

Section 9. Perfection, priority and enforcement

9.1 How is a security interest in each type of security perfected and how is its priority established?

Security interests may be protected and prioritised through mortgage and pledge registrations with the relevant authorities.

9.2 Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise or defer them?

There are related fees and taxes which may be contractually transferred to other parties or mitigated by agreement with the local government.

9.3 May a corporate entity, in the capacity of agent or trustee, hold security on behalf of the project lenders as the secured party?

Yes.

Section 10. Bankruptcy proceedings and enforcement

10.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral/security?

During bankruptcy proceedings, guarantors have priority rights over securitised assets superior to bankruptcy-related costs, debt related to the public benefit, wages, insurance, etc. However, guarantor rights are suspended during the reorganisation period. For bankruptcy reconciliation proceedings, guarantor rights are also suspended before the court issues its decision.

10.2 Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the security?

A project lender may also enforce its agreement with the debtor (the mortgagor) such as receive the mortgaged property for a discounted price or auction the property. If the debtor refuses to implement the agreement, the project lender may also file a lawsuit requesting the auction or sale of the mortgaged property as well as priority rights to proceeds.

10.3 What processes, other than court proceedings, are available to seize the assets of the project company in an enforcement? For instance, is contractual enforcement (such as receivership) recognised?

To control project company assets, one might enforce security rights such as chattel mortgages or liens as well as utilise objections to execution and property preservation procedures. Other than conciliation of execution, it presently is not feasible in China to use contractual enforcement.

About the author

Jihong Wang
Senior partner, Zhong Lun Law Firm

Beijing, China
T: + 86 10 5957 2288
E: wangjihong@zhonglun.com
W: www.zhonglun.com

Jihong Wang is a senior partner at Zhong Lun Law Firm where she co-chairs the infrastructure and real estate department. She is widely recognised as a project financing expert by national and local governments as well as state-owned and private construction companies and financing institutions. For over a decade, she has advised on infrastructure financing, including PPP financing, as well as energy and real estate projects throughout China and in over a dozen countries.

Wang provides comprehensive legal services for project financing relating to transactional structure design, contract negotiations, tendering, construction, transfers and operations, as well as project financing avenues including bond issuance, government sub-loans, financial leasing, collective trusts and loan schemes. She also participates in the post-construction phase such as by introducing and collaborating with strategic partners on capital increases, M&A and asset securitisation.


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