SAFE and Sound
A conspicuous irony of the Asian financial
crisis for China investors is that the general non-convertibility of the renminbi (RMB), about which foreign investors have long
complained, has in fact enabled China to escape the regional turmoil relatively
In the aftermath of the Asian financial
crisis, the PRC leadership has responded by adjusting China's policies on
foreign debt and foreign direct investment (FDI), as well as its timetable for
full convertibility of the RMB. Since mid-1997,
Rather than take on short-term foreign debt,
a primary cause of the crises in other Asian countries, China is promoting FDI.
Prior to Asia's financial implosion in 1997, China's leaders appeared to be targeting an aggressive timetable for making the RMB a fully convertible currency. To that end, the PRC government declared in 1996, several years ahead of the original target date, that the country's currency was convertible for current account transactions, making the RMB officially convertible for profit repatriation and trade in goods and services. PRC officials also have offered to abolish foreign-exchange balancing requirements and export quotas for FIEs in connection with the country's bid to join the World Trade Organization (WTO). Combined with the PRC's rapidly growing foreign-exchange reserves, which topped $140 billion in 1997, these moves suggested that convertibility of the RMB for capital account transactions was perhaps a realistic goal by the year 2000.
But the financial crisis halted progress on
full RMB convertibility. Despite mounting bad debts and an ailing banking
sector, the non-convertibility of the RMB shielded the currency from
speculative attacks by world financial markets. As a result,
SAFE Tightens Debt Controls
The financial problems in Indonesia,
Thailand, and South Korea illustrated the dangers of uncontrolled borrowing of
foreign currencies by non-sovereign borrowers. For example,
But a number of analysts and international organizations believe that official PRC statistics underreport the country's true level of foreign indebtedness. Official PRC statistics show utilized foreign bank commercial loans in the first 11 months of 1997 of only $904 million. Records of the Bank of International Settlements, however, indicate a debt load of $86 billion in June 1997, up from $75 billion in June 1996. According to some analysts, offshore accounts of PRC entities may also have significant foreign-debt obligations that are not reflected in official figures.
To keep a lid on China's foreign indebtedness, SAFE issued the following regulations: the Procedures for the Administration of the Borrowing of International Commercial Loans by Domestic Institutions (the International Loans Procedures), Procedures for the Administration of Foreign Currency Bonds by Domestic Institutions (the Foreign Bonds Procedures), Implementing Rules for the Statistical Monitoring of Foreign Debts (the Debt Monitoring Implementing Rules), Implementing Rules to the Procedures for the Administration of the Provision of Security to Foreign Entities by Domestic Institutions (the Foreign Security Implementing Rules), and Provisions on the Administration of Overseas Foreign Exchange Accounts (the Forex Accounts Provisions). These regulations, which took effect January 1, supersede or supplement previous regulations, and increase government control over foreign-exchange transactions, either by tightening the requirements for such transactions or by extending the coverage of the regulations over previously unregulated transactions.
International Loan Procedures
The International Loan Procedures replace the 1991 Loan Procedures issued by the State Administration of Exchange Control (SAEC), SAFE's former English name. The new procedures require all PRC enterprises to obtain central- or local-level SAFE approval before securing any international commercial loan that constitutes an obligation to a foreign financial institution or individual either inside or outside the PRC.
Compared to the 1991 Loan Procedures, the international Loan Procedures are considerably broader in scope and more restrictive. For example, the definition of "international commercial loans" now includes export financing, financing leases, foreign-exchange payments in connection with compensation trade, overseas foreign-exchange deposits (except with approved offshore banking departments of PRC banks), project finance, and trade-related finance with terms exceeding 90 days. The International Loan Procedures also set forth stringent criteria for approving requests by non-financial PRC institutions to secure international commercial loans. Such criteria include the requirements that the borrower be profitable for three years prior to seeking a loan, and that its total international loans and provision of foreign security not exceed 50 percent of its net assets or its total foreign-exchange revenues for the previous year.
Many provisions of the International Loan
Procedures apply to FIES, unlike the 1991 regulations. For example, under the
1991 procedures, a PRC company with more than 25 percent of its registered
capital in the form of B shares (the type of tradable share available to
foreigners) qualified as an FIE and thus could secure international commercial
loans without SAFE approval. But the International Loan Procedures could be
interpreted to require SAFE approval for certain international loans to FlEs that relate to project finance. It remains uncertain
how many of such provisions actually can apply, in practice, to FlEs, as most of them are directed at domestic PRC
enterprises. Foreign investors will need to await further interpretation by
SAFE before gauging the impact of the International Loan Procedures on their
Foreign Bonds Procedures
The Foreign Bonds Procedures override the Procedures for the Administration of Bond Issues Outside the PRC by Domestic Institutions, promulgated by the People's Bank of China (PBOC) on September 28, 1987. Under the new procedures, SAFE approval is required for the issuance of all securities denominated in a foreign currency, including convertible bonds, large-denomination transferable certificates of deposit, and commercial paper. All the provisions of the Foreign Bonds Procedures apply to FIEs. Thus, FIEs and PRC companies with more than 25 percent foreign equity cannot issue any type of foreign currency bond or other security without SAFE approval, even floating-rate notes or other securities that resemble loans. The Foreign Bonds Procedures also prohibit local governments from issuing bonds outside the PRC, or applying for a credit rating issued by a foreign agency.
Debt Monitoring Implementing Rules
The Debt Monitoring Implementing Rules
supersede the Implementing Rules for Foreign Debt Registration, issued by SAEC
on November 10, 1989. These monitoring rules detail the legal framework for
registering and tracking the total national foreign-debt exposure, including
the foreign debt of enterprises and government ministries. Although most FlEs do not need SAFE approval for international commercial
loans, these monitoring rules require all FlEs to
report such loans to SAFE. Rigorous enforcement of the Debt Monitoring
Implementing Rules will help
Foreign Security Implementing Rules
The Foreign Security Implementing Rules supplement the Administrative Procedures for the Provision of Security to Foreign Entities by Domestic Institutions (the Security Procedures), which PBOC issued on September 25, 1996. The Securities Procedures and the Foreign Securities Implementing Rules aim to curtail indiscriminate guarantees and other abuses that already have resulted in the closure of a number of provincial and ministerial trust and investment corporations in the PRC (see The CBR, January-February-1997, p.16). These implementing rules, in 52 detailed articles, reinforce SAFE's authority over all types of security provided to foreign entities, including guarantees, mortgages, and pledges. The provision of such security represents a contingent foreign-exchange obligation, and requires SAFE approval. Under the Foreign Security Implementing Rules, however, the provision of security by wholly foreign-owned enterprises does not require SAFE approval.
Foreign Exchange Accounts Provisions
The Foreign Exchange Accounts Provisions
replace the Provisions on the Administration of Overseas Foreign Exchange
Accounts of FlEs, issued by SAEC on January 7, 1989,
which applied only to FlEs. Under the Foreign
Exchange Accounts Provisions, SAFE must approve the establishment of any
overseas foreign-exchange accounts by domestic institutions. Because of the
still imperfect legal framework in the PRC for taking security interests, such
as a lien or mortgage over assets, foreign lenders in
Revitalizing Foreign Investment
Beijing has also sought to bolster declining
foreign investment levels by reinstating the tariff and tax exemptions in
conjunction with the issuing of a revised Guiding Catalogue for Foreign
Investment in Industry.
Such arguments prompted Beijing to revoke
tariff and duty exemptions for all capital imports of FlEs
approved on or after April 1, 1996. Ironically, PRC officials claimed the move
represented the government's commitment to honor requests by the
The effect of removing the tariff exemptions
on foreign investment in China were not readily apparent in 1996, in part
because foreign companies had accelerated their capital import timetables to
beat the various deadline phases. But the precipitous drop--by more than a
Although China has so far avoided the worst
ravages of the Asian financial crisis, it shares many of the systemic ills of
its Asian neighbors, including massive nonperforming bank portfolios, fragile
financial institutions, and an overbuilt property sector.
*Mr. Chang has represented SAFE as legal counsel in certain corporate finance transactions with international financial institutions. For more information concerning Mr. Chang, please go to: http://www.zhonglun.com/en/lawyer_246.aspx