On 24 November 2017, the State Administration of Foreign Exchange (“SAFE”) issued the Notice on Perfecting the Foreign Exchange Administration of Outbound Guarantees of Foreign Loans by Domestic Banks (the “notice”). The notice aims to strengthen the foreign exchange control of domestic banks that provide outbound guarantees by requiring banks to:
- Confirm the qualifications of an offshore borrower, where it is directly or indirectly controlled by a domestic resident, by mainly examining whether it meets the relevant administrative requirements on outbound investment.
- Conduct due diligence to confirm the likelihood of an offshore borrower’s performance by identifying the source of the borrower’s first repayment, operating status, debt ratio and so on.
- Accept primary liability and perform using their own funds when a default on the principal debt occurs, instead of performing by purchasing foreign exchange on the strength of a counter-guarantee.
The notice also reiterates that proceeds of a foreign loan should not be engaged in arbitrage or other speculative transactions, such as investing in China’s inter-bank bond or securities markets. Where the proceeds are used to obtain the equity or debt of another foreign institution, the investment should be consistent with China’s policy guidance and administrative rules on outbound investment. This reflects the Guiding Opinions on Further Guiding and Regulating the Directions of Outbound Investment 2017 jointly issued by the National Development and Reform Commission (NDRC), the Ministry of Commerce, the People’s Bank of China and the Ministry of Foreign Affairs of the People’s Republic of China on 17 August 2017.
In practice, SAFE may interpret the notice to also apply to any domestic institution or individual that guarantees an offshore loan, and not just to banks.