Reed Smith In-depth

China’s National Development and Reform Commission (NDRC) issued Administrative Measures for the Approval and Registration of Medium to Long-term Foreign Debts of Enterprises (《企业中长期外债审核登记管理办法》, 发改委 [2023] 第56号, the New Measures) on 5 January 2023. The New Measures, which came into force on 10 February 2023, replace the Notice on Promoting the Reform of the Filing and Registration System for the Incurrence of Foreign Debts by Enterprises (《关于推进企业发行外债备案登记制管理改革的通知》, 发改外资 [2015] 2044号, the 2015 Circular) which had been in force since 2015.

The NDRC also published new Q&As (the New Q&As) and a new Practice Manual (《企业借用中长期外债审核登记办事指南》, the New Practice Manual) on 9 February 2023, shedding light on the interpretation and practical implementation of the New Measures.

This article seeks to summarise the core contents of the New Measures, the New Q&As and the New Practice Manual, in particular the key changes compared with the 2015 Circular, and analyse their potential impact.

What are the new requirements and key changes?

Attention to risk prevention

Compared with the 2015 Circular, the NDRC’s grounds for approval have been changed to “controlling the total [debt] amount, optimizing structure, serving the real economy and preventing risks [emphasis added]”. The new focus on risk prevention reflects the NDRC’s generally more cautious approach to vetting and approving medium to long-term foreign debt.

Substantive (rather than procedural) review

(a.) Under the New Measures, the NDRC is responsible for the “approval and registration” (审核登记) of medium to long-term foreign debt (rather than the “filing and registration” (备案登记) as stipulated in the 2015 Circular), and the issuing of a Certificate of Approval and Registration (《审核登记证明》) upon completion of such process. This subtle change of terminology clarifies that the NDRC’s review of the relevant application is very much of a substantive nature, rather than procedural. An enterprise cannot borrow or draw down before the NDRC’s approval and receipt of the relevant Certificate of Approval and Registration.

(b.) Despite the 2015 Circular having been repealed, an enterprise may continue to borrow foreign debt pursuant to any existing Certificate of Filing and Registration (《备案登记证明》) previously issued by the NDRC during the term of such certificate’s validity.

Meaning of “control” clarified

As with the 2015 Circular, the New Measures apply to medium to long-term (i.e., longer than one year) foreign debt incurred by (i) any PRC enterprise or (ii) any non-PRC enterprise/branch controlled by a PRC enterprises.

The New Measures have now clarified that “control” means:

(a.) the direct or indirect ownership of [over] 50% (半数以上) of the voting rights of an enterprise; or

(b.) the ability to decide important matters of an enterprise such as its business operations and its management of finance, human resources and technology. This would include, for example, offshore companies held under a variable interest entity (VIE) structure.

Examples of “debt instruments” provided

The New Measures provide that medium to long-term “debt instruments” that are subject to the New Measures include, but are not limited to, “senior bonds, perpetual bonds, capital debentures, medium-term notes, convertible bonds, exchangeable bonds, finance leases and commercial loans”.

Scope of “foreign” debts further clarified

As was the case previously, any borrowing from an offshore branch of a PRC bank will count as foreign debt. The New Q&As have now further clarified that this includes the borrowing of offshore funds from a bank’s sub-branch in a PRC free trade zone.

Indirect borrowing by a PRC enterprise also applicable

In addition to direct borrowing by a PRC enterprise or a non-PRC enterprise/branch controlled by a PRC enterprise, the New Measures also apply to indirect medium to long-term borrowing in the name of a non-PRC enterprise by a PRC enterprise with its main business activities within the PRC, where such offshore borrowing is based on the PRC enterprise’s equity interests, assets, revenues or other similar rights and interests.

While somewhat vaguely written, this requirement likely covers, inter alia, the common domestic security for foreign loans (内保外贷) structure where a non-PRC parent company takes out an offshore loan for use by, and secured by the assets of, its PRC subsidiary.

New restrictions on the use of debt proceeds

(a.) Under the New Measures, debt proceeds should be used for the enterprise’s main business and be beneficial to the implementation of major national strategies and the development of the real economy.

(b.) In addition, the use of debt proceeds must not:

i. contravene PRC law;

ii. threaten or adversely affect the PRC’s national interests, economy or information and data security;

iii. be contrary to the objectives of the PRC’s macro economic control;

iv. be inconsistent with the PRC’s relevant development plans and industry policies, or increase local governments’ hidden debts; or

v. be used for speculative purposes or for on-lending (except for financial institutions or where the NDRC specifically approves).

Debtor enterprise subject to stricter eligibility requirements

(a.) The New Measures impose the following eligibility requirements on the enterprise:

i. It should be duly incorporated and validly existing, with legally compliant business operations and a robust and well-functioning corporate structure.

ii. It should have a reasonable need for foreign debt, its proposed use of debt proceeds should comply with the aforesaid requirements, and it should be able to meet its payment obligations and have a robust foreign debt risk management system.

iii. Within the previous three years, neither the enterprise, its controlling shareholders nor persons with actual control have committed corruption, bribery, the misappropriation of assets or crimes relating to the disruption of order of the socialist market economy, or have been investigated on suspicion of criminal behaviour or material breach of the law.

(b.) While the New Measures no longer explicitly require the due performance (i.e., non-default) of existing debts, it appears from the New Practice Manual that enterprises still need to provide the NDRC with information about their prior history of foreign debt repayment, so this will still be a factor considered by the NDRC.

Application to be made by PRC holding company

The New Q&As have clarified that the application to the NDRC should be made by the head office of the enterprise’s holding company in the PRC. Where the non-PRC enterprise is a 50:50 joint venture of two PRC enterprises, the application may be made by either shareholder in respect of the full debt amount.