Banking & Finance 2021

Last Updated October 05, 2021


Law and Practice


King & Wood Mallesons is at the forefront of this highly evolving market, from navigating and shaping regulatory changes to implementing innovative finance solutions for the market’s most complex and sophisticated transactions. It has one of the largest and most comprehensive teams handling banking and finance transactions across Greater China, with 30 partners and more than160 associates providing the latest industry insight and know-how. The team offers comprehensive legal services across the full spectrum of financial products, including aircraft/vessel and other asset financing/leasing; project financing; M&A financing; trade finance; real estate financing; pre-IPO and privatisation financing; syndicated loans; debt capital markets; asset-backed securitisation and structured finance; establishment/M&A/bail-out of financial institutions/platforms; non-performing assets sale and purchase; debt restructuring (out of court); derivatives; financial technology; bank card clearing; and third-party payments.

Real estate-related financing was the first to be affected by various strengthened regulations, particularly the "three principal red lines" introduced by the relevant authorities to set certain restrictions on each of the following ratio, with the aim of reducing the financing scale of real estate companies:

  • asset/liability ratio;
  • net debt ratio; and
  • cash/short-term debt ratio.

However, through the restriction imposed on each ratio, a significant increase in real estate M&A financing has been observed in the PRC financing market.

With the trend of Chinese companies delisting from the US and relisting in the PRC, there have been many privatisation financing deals over the past year. At the same time, a number of companies are still adopting round-trip structures and listing in offshore capital markets. If the main assets are located in China, the pre-IPO or restructuring financing usually involves the PRC operating entities providing a guarantee, as well as the collateral to secure the loan.

In the retail loan market, financiers extending loans through the internet will face strengthened supervision with the introduction of the new regulation imposed by the financial supervision and regulation authorities at the beginning of this year.

Due to the impact of the COVID-19 pandemic, the country's counter-cyclical adjustment efforts may not meet regular expectations, which will have an effect on banks' credit availability and risk appetite, thereby affecting the pace of asset expansion and net interest margins in the loan market. From a micro perspective, the COVID-19 pandemic will have varying degrees of impact on different industries, companies and individuals, and may affect the development of banking-related businesses and costs.

In response to the COVID-19 pandemic, commercial banks in the loan market are expected to devote their energy to developing full-featured online banks, innovating and updating current products, and gaining small and medium-sized enterprise customers, which is in accordance with the China Banking and Insurance Regulatory Commission's policy to support small and medium-sized enterprises during the pandemic.

Although the PRC was the first country to be hit by COVID-19, it was also the first to begin to recover from the pandemic. As the economy bounces back, PRC-incorporated companies are coming back to the bond market and continuing to sell successful deals in different currencies. Whilst high-yield debt issuances are yet to become a vital alternative financing source within the domestic PRC market, the overseas markets (including Hong Kong) continues to observe robust demand for PRC or PRC-sponsored issuances.

Several opportunities are arising in the alternative credit industry, which is currently facing increased supervision in the PRC, which may continue for some time. In the consumer finance area, the regulatory authorities have introduced a series of policies in the past few years to encourage the development of consumer finance. The favourable policies, such as lowering the coverage ratio requirement, will effectively improve the profitability and risk mitigation capabilities of consumer finance companies, and enable them to carry out transfers of credit income rights at the banking credit asset transfer registration centre and thereby further expand financing channels and business volume. Similar trends have been observed in different kinds of alternative credit industries.

The increasing financing demands of companies in supply chains not only stimulate banks granting regular loans, but also lead to factoring companies focusing on the supply chain financing. In the context of the country's emphasis on internal circulation, the development of the alternative credit industry can effectively stimulate domestic demand. The favourable regulatory policies have greatly helped to build up the confidence of the industry.

In addition, credit funds and other kinds of alternative credit providers have participated in the direct foreign debt to be granted to companies located in China, or invested in the NPL market.

Following the COVID-19 pandemic, both borrowers and lenders are tending to use more comprehensive forms of term sheets or commitment letters to avoid disputes or arguments during the documentation stage.

Regarding the performance of the loan documents, the regular terms in facility agreements (such as the financial undertaking of providing audited financial statements, etc) are at risk of not being able to be performed properly. Borrowers are more focused on the level of consent required for specific matters, grace periods, force majeure and other similar carve-outs to be set in the undertaking or event of default clauses.

On the other side, lenders are more cautious when granting such carve-outs or waivers, and tend to seek more frequent reports not only from the borrowers, but also from any security providers/guarantors, especially on the financial status of such parties.

In the meantime, with the Civil Code of the PRC having come into force at the beginning of 2021, which officially confirmed the security nature of non-standard security (such as the assignment of rights or the subordination of inter-company loans), there is more room for the relevant parties to negotiate credit support arrangements and for parties to be more creative in this area. This may also increase the likelihood of sponsors successfully arranging leveraged finance transactions without providing an all-around sponsor guarantee.

With the implementation of the Civil Code of the PRC in 2021 and related judicial interpretations and opinions, financial practice in general has witnessed many positive changes and innovations, including the following:

  • laws to follow for non-standard security;
  • clarity on the priority rules of secured property rights;
  • the expectation of the establishment of uniform publicity systems for movable property mortgages;
  • the adjustment of independent guarantees and guarantee liability presumption rules; and
  • strengthening of personal information protection.

Although new rules set by the above-mentioned laws and regulations do clear up much uncertainty that existed before, it is worth noting that many of the rules are more borrower/security provider -friendly, compared to the old rules, and lenders need to pay more attention to the negotiation of relevant documents to avoid the likelihood of disputes arising.

The PRC Authority is stepping up its efforts to promote the development of green loans. The People’s Bank of China is accelerating the development of a comprehensive system of green financing with certain green financial standards. A China-EU Shared Classification Catalogue for Green Finance is also forthcoming, likely to be launched later in 2021, which will help to provide guidelines for the regulation of green finance in the PRC.

Meanwhile, the Authority is encouraging product innovation with the promotion of the development of green loans. It also intends to direct local lenders to increase the resources that go towards providing green loans.

Any entity (including banks and non-banks) may provide loans to another company in the PRC. However, carrying out "lending business" (ie, providing loans on a regular basis) in the PRC is restricted to financial institutions or quasi-financial institutions that hold a lending licence from the relevant financial sector regulator (eg, banks, micro-lending companies). Specific case-based analysis is often required to determine whether someone is running the risk of conducting a “lending business” without the appropriate licence.

A foreign lender making cross-border loans to a PRC company is not required to be licensed in the PRC. However, the following is worth noting for foreign lenders:

  • a PRC company that intends to borrow loans from a foreign lender must have sufficient quota for borrowing loans from foreign lenders (the so-called “foreign debt quota”); and
  • the loans borrowed by a PRC company from any foreign lender shall be subject to registration with the State Administration of Foreign Exchange of the PRC (SAFE) and (if the tenor of such loans is more than one year) to filing with the National Development and Reform Commission of the PRC (NDRC).

There are no specific restrictions on the granting of security or guarantees to foreign lenders. However, any security or guarantees granted by a PRC company to foreign lenders to secure the liabilities of a debtor incorporated or organised outside the PRC (commonly known as Nei Bao Wai Dai) shall be registered with SAFE.

There are restrictions and controls on foreign currency exchange in the PRC. The People’s Bank of China and SAFE are the main authorities in charge of foreign exchange controls in the PRC, which are generally divided into two categories: current account activities and capital account activities.

Foreign exchange transactions relating to capital account activities (eg, borrowing from, and granting security or guarantees to, foreign lenders) are more heavily regulated and more strictly controlled than those relating to current account activities, and shall generally be subject to the approval of or registration/filing with SAFE.

Generally, the proceeds from loans or debt securities could be used for various purposes, including but not limited to investment in fixed assets, working capital purpose and acquisitions. That being said, the proceeds from loans or debt securities borrowed or issued by a PRC company outside the PRC shall, in principle, be used for purposes that fall within the business scope of such PRC company registered with the State Administration for Market Regulation of the PRC.

The concept of agent is recognised under PRC law, pursuant to which an agent may act for and on behalf of the principal(s). The concept of trust under PRC law (which means that the settler, based on his/her/its faith in trustee, entrusts his/her/its property rights to the trustee and allows the trustee to administer or dispose of such property in the interest of a beneficiary or for any intended purposes, according to the will of the settler and in the name of the trustee) is not applicable to the holding of security by the security agent for and on behalf of the lenders and therefore is not commonly used in the loan market.

A loan transfer is essentially the transfer of contractual rights under PRC law. The following generally applies:

  • the loan transfer will become effective between the transferor and the transferee as of the date of the execution and completion of the loan transfer between these two parties;
  • once the loan is transferred, the benefit of the associated security or guarantees shall be automatically transferred together with the loan; and
  • the loan transfer will become effective against the relevant borrower/security provider/guarantor as of the date on which such borrower/security provider/guarantor is notified of such loan transfer.

The transfer of loans is also subject to certain regulatory requirements (eg, the partial transfer of a loan by banks is currently not permitted) and to foreign exchange control (eg, a PRC lender may not transfer loans made to a PRC company to a foreign lender without the approval of SAFE).

There is no prohibition under PRC law on borrowers or sponsors buying back debt. The debt buy-back shall be subject to the regulatory requirements and foreign exchange control on the loan transfer. Contractual restrictions are often put in place where the buy-back is partial only.

In the acquisition of a company listed in the PRC, the financial consultant of the buyer is required by the regulators to ensure that the buyer has the ability to perform its obligations under the acquisition transaction, but there is no PRC law, regulation or rule regarding “certain funds” with respect to the loan facility used to finance public acquisition finance transactions. There is also no uniform standard regarding “certain funds” provisions in the acquisition finance transactions in the PRC. Such provisions could be agreed between the borrower and lender by themselves. In practice, loan documents will often include certain funds provisions that are comparable to those to be found in the documentation of an international acquisition finance transaction.

No withholding tax will be imposed on the payments of principal, interest or other payments made by a PRC company to lenders incorporated or organised in the PRC.

However, payments of interest and fees made by a PRC company to a foreign lender are subject to PRC income tax (current rate 10%), value added tax (current rate 6%) and surcharges, to be imposed by way of withholding on such payments, and taking into account any applicable double tax treaty that may provide for a lower rate.

For loans made by a PRC lender to a PRC company, value added tax (current rate 6%) and surcharges will apply on the payments of interest and fees, and PRC income tax (current rate 25%) shall be paid by the PRC lender on annual profit basis. For payments of interest and fees made by a PRC company to foreign lenders, taxes will apply by way of withholding.

No stamp duty or taxation of a similar nature is payable in the PRC in respect of the execution of security documents or guarantees. Stamp duty in respect of the loan agreement is required to be paid by the borrower and the lender respectively at the rate of 0.005% of the loan amount (to the extent that such lender is a financial institution).

According to PRC law, the rate of interest that can be charged by a lender that is not a financial intuition or a quasi-financial institution with a lending licence shall not exceed four times the one-year Loan Prime Rate prevailing as of the date of the loan agreement. There is no law or other rule limiting the amount of interest that can be charged by financial intuitions or quasi-financial institutions with a lending licence.


The following assets and forms of security are widely adopted by lenders in the loan market:

  • mortgage over immovable assets, including real property and construction land use rights;
  • mortgage over movable assets, including machinery, equipment, goods and raw materials, vehicles, aircraft and ships;
  • pledge over movable assets; and
  • pledge over rights and benefits, including shares and equity interest, deposit, bank accounts, receivables, etc.

Perfection Requirements

Mortgage over immovable assets

Security interest will be created once it is registered with the competent public register. For instance, a mortgage over real property will be created upon the completion of registration with the Real Estate Registration Centre of the Ministry of Natural Resources.

Mortgage over movable assets

Security will be created once the mortgage agreement is duly executed by the parties; such security interest cannot be claimed against any bona fide third party without registration.

Pledge over movable assets and financial instruments

Security interest will be created from the date of delivery of such movable assets and the title certificate of bills of exchange, promissory notes, checks, bonds, certificates of deposits, warehouse receipts or bills of lading. For pledges over financial instruments in particular, in the absence of a certificate, a pledge will be created upon the completion of registration with the competent authorities.

Pledge over rights and interest

For pledges over shares and equity interest, or intangible assets such as intellectual property and receivables, the security interest will be created upon registration with the competent authorities.

Unified Registration of Security Created Over Movable Property and Rights

Since 1 January 2021, the relevant parties can access the Movable Property Financing Unified Registration and Publication System of Credit Reference Centre to register the following types of security:

  • mortgage of production equipment, raw materials and semi-finished products;
  • pledge of receivables;
  • pledge of deposit certificates, warehouse receipts and bills of lading;
  • finance lease;
  • factoring;
  • title retention; and
  • other registrable security created on movable property and rights, but excluding mortgages over vehicles, ships andaircraft, and pledges of bond, fund shares, equity interest and property right of the intellectual property.


Although there is no specific time requirement for such registrations, it is advisable for lenders to require the obligors to complete the formalities as soon as reasonably practical, to ensure the creation of the security interest, its ranking in priority and rights against the bona fide third party.

Stamp Duty

Security documents are not subject to stamp duty or other taxes of a similar nature in the PRC.

Registration Fees

Depending on the type of security interest, some registrars may charge a registration fee, either based on the value of the collateral or as a lump sum, but such fees are not substantial.

Under PRC law, a floating mortgage can be created over the mortgagor's current and future manufacturing machinery and equipment, raw materials, semi-finished products and products.

Before crystallisation, the floating mortgage will not restrict the mortgagor's right to dispose of the mortgaged assets. Crystallisation will occur under the following circumstances:

  • non-payment by the debtor;
  • if the mortgagor is declared insolvency or dismissed;
  • any event mutually agreed by the parties to realise the mortgage; or
  • other circumstances that have a severe impact on the realisation of the secured indebtedness.

Exceptions to Priority in Ranking

Where an asset that falls within the scope of the floating mortgage has been purchased by a purchaser at a reasonable price through the mortgagor’s normal business activities, the security interest created on that asset cannot be claimed against the right of the purchaser.

For those assets of the mortgagor that are purchased or leased by way of finance lease after the creation and registration of the floating mortgage, if there is any mortgage or similar security created over those assets to secure the consideration or rent payable, which is registered within ten days of the delivery of that asset, the following interest will rank prior to the floating mortgage:

  • the mortgage created in favour of the seller and the right of the seller in the title retention arrangement;
  • the mortgage created in favour of the creditor financing the consideration; and
  • the right of the lessor who leases that asset.

Downstream, upstream and cross-stream guarantees are generally permissible under PRC law, provided that the guarantor has taken all necessary corporate actions to authorise the execution of the guarantee.

Shareholders’ resolutions are required for the provision of upstream guarantees to guarantee the liabilities of the guarantor's shareholder or ultimate controller. If such guarantor has more than one shareholder, the principal debtor-shareholder or the shareholder who is controlled by the principal debtor-ultimate controller shall have no voting rights in the passing of relevant shareholders’ resolutions.

Special Requirement for Listed Companies

For a listed company incorporated in the PRC (or any of its material subsidiaries that have been disclosed), the provision of security and guaranteed must be evidenced by a relevant public announcement in relation to the passing of internal resolutions. In the absence of such public announcement, the listed company or its material subsidiaries may claim against the creditors on the validity of such security and guarantee in legal proceedings.

Special Requirement for State-Owned Enterprises

A state-owned enterprise may provide security or guarantees for its subsidiaries, subject to the requirement that the portion of liabilities secured or guaranteed by such enterprise shall not go beyond the proportion of its shareholding in that subsidiary. Moreover, under certain circumstances, approval from or filing with the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) will be required, pursuant to regulations or guidelines promulgated by the SASAC or its local branch.

It is generally acceptable for the target to provide security, guarantees or financial assistance in favour of the acquirer in an acquisition transaction, subject to the conditions discussed in 5.3 Downstream, Upstream and Cross-Stream Guarantees in respect of upstream guarantees.

Please see 6.4 A Foreign Lender’s Ability to Enforce Its Rights regarding the requirements for the provision of cross-border security or guarantees.

Security will be released upon the following:

  • the discharge of secured liabilities;
  • the realisation of the security;
  • the secured creditor waiving its interest over the collateral; or
  • in other circumstances under which the security will be discharged, as prescribed by law.

In practice, for the purpose of deregistration with the relevant registration authority, the parties will enter into a bilateral release agreement or the secured creditor will issue a confirmation letter to the security provider, confirming the release of security interest, based on which the security provider can request the relevant registration authority to process the deregistration.

Competing Security Interest

Rules for competing mortgages/pledges

Where there are multiple mortgages/pledges created over a collateral, the priority will be determined as follows:

  • by the registration order, if all security interest has been registered;
  • if some security interest has been registered but some remains unregistered, those registered shall rank in priority to those that are unregistered; and
  • where no registration has been made, all interest shall rank in the same sequence and proceeds obtained through auction or sale of collateral shall be applied towards payment pro rata of all secured indebtedness.

Rules for competing mortgages and pledges

Where a mortgage and pledge are created over a collateral, the priority will be determined by the order of the registration of the mortgage and the delivery of that asset to the pledgee.

Rules for competing mortgages, pledges and lien

Where a mortgage, pledge and lien simultaneously exist over a movable asset, lien will rank ahead of mortgage and pledge.


Under PRC law, contractual subordination may be reached by agreement among all the creditors. In its simplest form, the senior creditors (typically the lenders) and the junior creditors (typically the shareholders of the borrower) will enter into an intercreditor agreement or a subordination agreement that stipulates that, unless otherwise permitted by the agreement or with the prior written consent of the senior creditor, all the indebtedness owed to the junior creditors and the right of the junior creditors in respect of said indebtedness shall be subordinated to the indebtedness owed to the senior creditors and be postponed to the right of the senior creditor in respect thereof.

Subject to the mandatory statutory principle of the order creditors are paid on insolvency and the right of revocation conferred to the insolvency administrator under the insolvency law, the contractual subordination shall remain effective in insolvency proceedings. Subordination agreements between the senior creditors and the junior creditors are generally given effect despite the borrower’s insolvency.

Where non-payment by a debtor occurs, or upon the occurrence of events to realise security agreed by the parties, the secured lender may take the following measures to enforce its security interest, without recourse to the PRC court:

  • take possession on the collateral agreed upon by the security provider;
  • instruct the security provider to sell or directly assign the security asset to a designated third party; or
  • instruct the security provider to sell the security asset directly or by way of public auction.

Any portion of the proceeds obtained from these steps that exceeds the secured indebtedness should be attributable to the security provider.

Special Procedure for Enforcement of Security Interest

PRC law provides a special procedure for the enforcement of security (the Realisation Procedure), in which the secured lender may directly apply for enforcement of the security by submission to the court that has jurisdiction. Since the Realisation Procedure is a non-litigious proceeding, the court may, at its discretion, only conduct prima facie review of the evidence submitted to prove the existence of secured indebtedness, the creation of a security interest and the occurrence of an event of default, etc.

If there is a substantive dispute between the secured lender and the security provider (such as the secured indebtedness, or whether any event of default has occurred), the application for the Realisation Procedure will be dismissed and the court will inform the parties to settle their dispute by initiating a litigation procedure.

Choice of Law

Under PRC law, only contracts relating to a foreign-related transaction may choose foreign law as the governing law, provided that such choice of law does not contravene any mandatory requirements under PRC law and does not jeopardise the public interest of the PRC.

Submission to a Foreign Jurisdiction

Generally speaking, the parties are free to submit disputes relating to a foreign-related contract to a foreign court that has an actual connection with the underlying transaction, provided that the PRC court has no exclusive jurisdiction over that dispute. For example, PRC courts shall have exclusive jurisdiction over disputes arising from the performance of a Sino-foreign joint venture, a Sino-foreign co-operative enterprise, or a Sino-foreign co-operative exploration or development of natural resources contracts within the territory of the PRC mainland.

Recognition and Enforcement of Foreign Arbitral Awards

As the PRC is a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the New York Convention), arbitral awards rendered by arbitral tribunals through institutional arbitration proceedings in another contracting state shall be recognised and enforceable in the PRC, unless they otherwise fall within the circumstances set forth under the New York Convention whereby a contracting party may be entitled to refuse to recognise and enforce an arbitration award.

Recognition and Enforcement of Foreign Judgments

In brief, when determining whether a foreign judgment will be recognised and enforced, PRC courts rely on the following six standards:

  • the foreign judgment in application must be final and effective;
  • pursuant to the applicable foreign laws, the court rendering the judgment must have jurisdiction over the case;
  • pursuant to the applicable foreign laws, the litigation procedure conducted in the foreign court must be fair and legitimate – for instance, the respondent must have been duly served and given the opportunity to be heard, etc;
  • conflicting judgments do not exist – PRC courts do not hear any case with identical parities for the same subject matter, or in which an effective judgment has not been issued, nor do they recognise a third-country judgment of the same case;
  • international treaties or reciprocity exist between the PRC and the other country for the mutual recognition and enforcement of civil and commercial judgments; and
  • the recognition and enforcement of such judgment does not contravene the fundamental principles of PRC law or sovereignty, security or the public interest.

In general, there is no restriction on the enforcement of a foreign lender’s rights under a loan agreement or security agreement, provided that all the registration, filing or other similar formalities as required for cross-border transaction have been duly completed, including but not limited to the following (as applicable).

Foreign Debt Registration

A PRC enterprise is required to conduct in-advance filing and post reporting with SAFE in respect of its offshore borrowing or offshore debt issuances.

NDRC Filing

A PRC enterprise is required to conduct in-advance filing and post reporting with NDRC in respect of offshore borrowing or offshore debt issuances (in each case with a tenor over one year) by it and any offshore entity or branch controlled by it.

Cross-Border Security Registration

A PRC enterprise is required to register with SAFE for its provision of cross-border security and guarantees to secure the indebtedness owed by an offshore borrower to an offshore lender within 15 business days of the date of relevant security or guarantee agreement. Although failure to complete this registration will not affect the validity of the security and guarantee agreement, the outbound remittance of proceeds obtained through enforcement of such security or guarantee may be restricted without such registration.

Although there is no unified legislation to regulate company rescue or reorganisation procedures outside of judicial insolvency proceedings, creditors' committees among banking financial institutions have become a common mechanism in dealing with the debt of financial institutions since the issuance of Circular No 1196 by the China Banking and Insurance Regulatory Commission (CBIRC) in 2016.

A creditors’ committee is an ad hoc organisation set up by at least three banking financial institutions that are creditors of a company experiencing large-scale repayment difficulties in respect of loans, bonds or other debts. The members of the creditors' committee are limited to banking financial institutions and financial institutions approved by the CBIRC or other regulatory authorities.

Based on negotiations and self-discipline, members of the creditors' committee will form a joint credit management mechanism and make concerted efforts to facilitate a debt restructuring and resolve the debt crisis.

When the application for insolvency has been accepted by the court, the following may occur while the lenders exercise their rights:

  • automatic acceleration of debt – all the debt of the insolvency company that remains outstanding shall become immediately due and payable;
  • cessation of calculation of interest – upon the court's acceptance of the insolvency application, the calculation of the interest on all debt shall be ceased immediately; and
  • suspension of enforcement of security during the judicial reorganisation procedure – if a security provider is involved in the judicial reorganisation procedure, the enforcement of security interest will be suspended, unless the secured asset is likely to be damaged or its value might be significantly reduced, or if there are other circumstances that will jeopardise the creditor’s rights.

Secured Indebtedness

A secured creditor who has security interest over a specific asset of the insolvent company shall have priority over the collateral. However, if the proceeds obtained from the enforcement of security are insufficient to discharge all the secured indebtedness, the remaining unsettled liabilities should be treated as unsecured indebtedness.

Unsecured Indebtedness

For unsecured indebtedness, after the discharge of all the insolvency costs and expenses and the collective debts, the remaining insolvency proceeds shall be applied in the following order:

  • payment to employees, including wages and compensation owed to employees, without limitation;
  • other social insurance expenses and unpaid taxes; and
  • unsecured indebtedness owed to normal creditors.

Where the insolvency proceeds are insufficient to discharge all the liabilities in the same order, the payment shall be on a pro rata basis.

There is no concept of equitable subordination under PRC laws. All creditors are allowed to declare their rights when a debtor goes into insolvency.

Restriction on Separate Settlement

The insolvency administrator is entitled to apply to the court for the revocation of a separate settlement made by the insolvency company to the creditor within the six months prior to the date of acceptance of the insolvency application by the court, unless such separate settlement is made to benefit the asset of the insolvency company.

Revocation by the Insolvency Administrator

The insolvency administrator may apply to the court for revocation of the following actions if they are conducted by the insolvency company within one year prior to the date of acceptance of the insolvency application by the court:

  • transferring its assets without any consideration;
  • selling its assets at an obviously unreasonable price;
  • providing security for an unsecured indebtedness;
  • making early redemption on undue liabilities; and
  • waiving any debts owing to it.

Project finance was introduced to the PRC in the 1980s and has been developing rapidly following the economic reform and opening up of the infrastructure construction sector in the 1990s.

Currently, the public-private partnership (PPP) model is in favour in the project finance market in the PRC. Based on the data disclosed in the National PPP Information Platform, as of 16 August 2021, there were 10,113 PPP projects in the database nationwide, with a total investment of RMB15.74 trillion, covering 19 sectors (including energy, transportation, water resources, environmental protection, municipal engineering, agriculture, science and technology, affordable housing, tourism, medical care and public health, elderly care, education, culture, sports, social security and government infrastructure).

Project finance in the PRC is not subject to any specific legal framework, and projects will be subject to different requirements, depending on the nature thereof. Please see 8.3 Government Approvals, Taxes, Fees or Other Charges for further detail.

Modes of PPP Transactions

PPPs in the PRC adopt four different models – ie, build-operate-transfer (BOT), build-own-operate-transfer (BOOT), build-transfer-operate (BTO) and build-own-operate (BOO); BOT has long been the most widely adopted model. These models will be used according to the project's repayment sources:

  • BOT or BOOT for projects that have a steady project revenue to cover all the investment costs and expenses;
  • BOT or BOO for projects that lack sufficient project revenue and rely on government subsidies; and
  • BOO for non-profit projects, as recommended by NDRC, accommodated with procurement by the government. The BTO model is often seen in public utilities projects.

Supervising Administration and Restrictions

The PPP mode mainly applies to public service and infrastructure projects that are suitable for market-driven operations, such as electricity, water supply and public transportation, in which the franchisee will be selected through a formal tender process or competitive negotiations. NDRC recommends that the PPP mode is the first choice for the construction of new municipal engineering and urbanisation pilot projects.

In the PRC, PPP transactions come under the supervision of NDRC, the Ministry of Finance and other regulatory authorities based on the nature of the project, including without limitation the Ministry of Housing and Urban-Rural Development, the Ministry of Transport, the Ministry of Water Resources and the People's Bank of China.

To implement the general principle of balance between risks and returns in supervising PPP transactions, the PRC government and any governmental authorities are prohibited from repurchasing the share capital of private entities, indemnifying any loss suffered by private entities, or giving any kind of undertaking on a fixed return. A PPP transaction may also be subject to further limitation due to its location and industry.

Governmental Approval

In general, the following formalities are required to be completed for a project:

  • project filing/approval from NDRC;
  • approval of environmental impact analysis from the Ministry of Ecology and Environment (the MEE);
  • land use right obtained from the PRC government, land plan permit and project plan permit issued by the Municipal Planning and Natural Resources Bureau of the Ministry of Natural Resources, and project construction permit issued by the Ministry of Housing and Urban-Rural Development; and
  • other formalities as required, depending on the nature and location of a project.

Taxes, Fees or Other Charges

The tax regime governing project finance transactions is generally the same as for other commercial loan transactions, as set out in 4. Tax.

Transaction Documents

The governing law of transaction documents for projects implemented in the PRC will generally be the PRC law. Subject to any formalities required in cross-border transactions (see 6.4 A Foreign Lender’s Ability to Enforce Its Rights) and the perfection requirement for the creation of security (see 5.1 Assets and Forms of Security), it is not necessary to register or file the transaction documents with a governmental authority.

The government bodies generally responsible for the initiation, implementation and supervision of oil and gas, power and mining projects are as follows:

  • NRDC is responsible for the planning of key construction and infrastructure projects, and has the authority to approve all fixed-asset investment projects;
  • the Ministry of Natural Resources isauthorised to grant permits and licences for the exploration and extraction of oil and gas and mineral resources;
  • the National Energy Administration of NDRC is responsible for the supervision of the energy market (including oil, gas and electricity power) and the formulation of national plans for the development of energy infrastructure; and
  • the MEE deals with environmental issues relating to the utilisation and exploitation of energy and resources

The first issue a foreign investor may consider when structuring a project is whether the business sector of the project has any foreign investment restrictions. Foreign investment control in the PRC adopts a “Negative List” mechanism, whereby NDRC and the Ministry of Commerce will issue and update a list of industrial sectors and business types that are prohibited for foreign investors or restricted in terms of foreign control. According to the latest Negative List promulgated by NDRC and the Ministry of Commerce in 2020, such prohibited sectors include prospecting and mining of rare earth, radioactive minerals and tungsten, etc. Some areas restrict foreign controlling – eg, nuclear plants must be controlled by domestic investors.

Foreign investors should also consider the bankability of the project and the related contractual arrangements. Domestic banks are usually more willing to rely on the credit of the sponsors instead of only on the project assets and project revenues. So, when assessing the bankability of the project, the investors should conduct a thorough and comprehensive risk analysis to properly allocate the risks in the transaction documents.

The most traditional financing sources for project finance transactions are term loan facilities provided by a single bank or a consortium of policy banks, commercial banks or other financial institutions. In the past few years, participants in the project finance market have become more diversified, as social security funds, insurance funds and other public funds are permitted to be involved in project financing through debt, equity investment and other ways.

Meanwhile, the project owners of large-scale infrastructure projects are considering using more sophisticated structured financing instruments as alternative financing sources, such as project revenue bonds, Green Bonds, Green ABS and REITs.

In general, financing on all types of projects will be subject to the requirements regarding the debt-to-equity ratio (the highest of which is 80:20), which may be adjusted from time to time by the PRC government according to the market situation.

Ownership and Acquisition of Natural Resources

Natural resources within the territory of the PRC are exclusively owned by the state, including minerals oil and gas. Relevant permits and licences will be required for the exploiting, acquiring and using of such natural resources (see 8.4 The Responsible Government Body).

Export of Natural Resources

PRC law applies quota administration and export administration for export control. Goods with specific quantity restrictions can only be exported in limited quantities, while an exporting licence will be required for other goods that are subject to export restrictions.

The goods subject to export restrictions are regulated under the list of goods subject to quota and the list of goods subject to the requirement of an export licence, each of which is published by the Ministry of Commerce on an annual basis. According to such lists, natural resources including coal, oil and various rare earth elements cannot be exported without complying with the relevant requirements.

Responsible Regulatory Bodies

The MEE is responsible for reviewing and approving the environmental impact assessment reports of projects, monitoring project companies' compliance with environmental protection laws and policies, and supervising the installation and acceptance of necessary waste prevention and treatment facilities within construction projects.

The National Health Commission and the Ministry of Emergency Management are the regulatory authorities overseeing health and safety issues in the PRC.

Applicable Laws and Regulations

The main environmental laws that apply to projects in the PRC are the Environment Protection Law, the Environmental Impact Assessment Law and the Fire Protection Law. In particular, depending on the nature thereof, projects in the PRC may also be subject to legislation on air pollution, sustainable development, waste management, water protection, soil protection and noise pollution, etc.

The Law on Prevention of Occupational Diseases and related implementing rules and guidelines serve an important role in regulating employers’ obligation to ensure the health and safety of employees. There may also be sector-specific laws and regulations applicable to the project, depending on the nature thereof.

King & Wood Mallesons

18th Floor, East Tower
World Financial Center
No.1 Dongsanhuan Zhonglu
Chaoyang District
Beijing 100020
P. R. China

+86 10 5878 5588

+86 10 5878 5566
Author Business Card

Trends and Developments


King & Wood Mallesons is at the forefront of this highly evolving market, from navigating and shaping regulatory changes to implementing innovative finance solutions for the market’s most complex and sophisticated transactions. It has one of the largest and most comprehensive teams handling banking and finance transactions across Greater China, with 30 partners and more than160 associates providing the latest industry insight and know-how. The team offers comprehensive legal services across the full spectrum of financial products, including aircraft/vessel and other asset financing/leasing, project financing, M&A financing, trade finance, real estate financing, pre-IPO and privatisation financing, syndicated loans, debt capital markets, asset-backed securitisation and structured finance, establishment/M&A/bail-out of financial institutions/platforms, non-performing assets sale and purchase, debt restructuring (out of court), derivatives, financial technology, bank card clearing, and third-party payments.


The COVID-19 pandemic that broke out in 2020 continues to affect the financial market in China. Financial institutions are increasingly migrating their traditional offline financial services online, and the importance of the use of fintech in sales and marketing, product distribution and risk management continues to rise. Meanwhile, China's leading online platforms have increased their investment of resources into financial business, and some have achieved discernible competitive advantages in the personal loan and wealth management product distribution business, thanks to their significant website traffic.

In response to the challenges posed by the pandemic, China's financial regulators implemented comprehensive supervisory measures over fintech, such as controlling capital adequacy ratios, optimising risk management and strengthening financial consumer protection. Regulatory requirements for online lending, online insurance and online deposit businesses have been introduced successively, explicitly prohibiting online platforms from offering unauthorised financial products or financial services without a financial licence, except for marketing activities for other financial institutions only.

Personal Financial Information and Data Protection

The development of informatisation in the financial services sector has led to an explosive increase in the quantity of financial data, which has also brought the attention of financial regulators and financial consumers to personal information and data protection issues. In the past few years, financial regulators have continued to formulate and promulgate general and technical standards in relation to financial data, and have established preliminary regulatory frameworks in areas such as personal financial information collection and sharing, data classification and security protection, and data security review. With the promulgation and implementation of the legislation relating to personal information protection, cybersecurity and data security, cross-border transfers and overseas storage of onshore financial data will become subject to severe restrictions and even regulatory reviews by China’s regulators when necessary. This could be an inevitable challenge to all financial institutions when carrying out cross-border business.

Digital Currency

China maintains its leading position in the field of digital payments. In 2020, China further cracked down on the offering and trading of cryptocurrencies in order to pave the way for the pilot use of e-CNY, and safeguard the expansion thereof. E-CNY is a form of fiat currency issued by the central bank of China, and the exchange services are currently provided through commercial banks to individual users. The loosely coupled system between an e-CNY account and the balance in the bank accounts is designed to allow the use of e-CNY without a bank account, and to effect offline e-CNY payments in any extreme environment where networks are unstable or unavailable.

In light of the upcoming Beijing Winter Olympics in Changping, the People's Bank of China (PBOC) plans to allow foreign tourists to register for an e-CNY wallet by submitting only an overseas mobile phone number or email address, in order to facilitate their small amount consumptions in China. As of the first half of 2021, 20.87 million personal e-CNY wallets have been activated, and more than 70.75 million transactions have been completed, amounting to roughly RMB34.5 billion. Milestones aside, the PBOC has yet to propose any concrete timeline for the use of e-CNY in cross-border payments and wholesale business between financial institutions in the near future.

Opening Up of the Financial Market

Both inward investment into and outward investment from China's financial market have been further promoted over the past year, and the opening up process continues to accelerate. At present, after the recent removal of the restricted and prohibited items in the financial service sectors, as numbered on the FDI negative list, all financial service sectors are opened up to foreign investors. The first-ever foreign-funded non-banking payment institution, the first-ever wholly foreign-owned securities company and futures company, and the first-ever wholly foreign-owned fund management company were approved and many innovative cases made a debut in 2020, spurring participation and confidence in the Chinese financial market among foreign financial institutions.

At the same time, the "GBA Wealth Management Connect" has been launched in the Guangdong-Hong Kong-Macao Greater Bay Area, allowing qualified Chinese residents to use cross-border RMB to invest in qualified investment products distributed by banks in the Hong Kong SAR and Macau SAR. The multi-currency bank settlement accounts will be launched in a pilot scheme in order to facilitate cross-border business. The path for the RMB convertibility under the capital account is soon to be formulated and promoted in the Hainan and Shanghai Pudong areas, so as to offer more RMB financial products for international investors. It shows that improving the level of RMB internationalisation will still be one of the key goals of China's reform and opening up in the financial market in the future.

Derivatives and Systematic Important Risk Management

The market has long been expecting a brighter future for financial derivatives, and we have never been so close as we are now. In response to the call for financial support for the real economy, financial institutions are required to provide a full spectrum of services to corporates, including raising their awareness of risk-neutral strategies and providing them with financial tools to mitigate the risks associated with market fluctuations of foreign exchanges and interest rates.

An increasing number of hedging products are emerging in the market. Financial institutions offering those mitigation tools need to hedge their risks through back-to-back trades and watch out for any systemically important crises, which could break out from time to time.

“Innovation” and “risk control” are the most critical concepts that underpin the derivative market. Encouragingly, “single-agreement” and “close-out netting” are being recognised for the first time at the law level in the consultation papers of the PRC Commercial Banks Law and the PRC Futures Law, and their legal certainty will be significantly improved in order to create a safe harbour in the current PRC bankruptcy regime. Those consultation papers are greatly welcomed by market participants in China and abroad.

In order to mitigate the systemically important risks, PRC regulators are also making progress on the rules and regulations for domestic systemically important financial institutions (D-SIFIs), including the assessment parameters of D-SIFIs, special resolutions of D-SIFIs and their living wills in accordance with the Key Attributes of Effective Resolution Regimes for Financial Institutions published by the FSB. An increasing number of domestic and international players are expected to become more confident and interested in transacting OTC or exchange-traded derivatives with PRC counterparties after the finalisation of the upcoming laws, rules and regulations. A better and comprehensive system will be established for the purpose of price discovery, risk management and resource allocation, bringing many more risk management tools that align with international standards and constituting healthy guidance to the market.

Green Finance

The goal of “Emission Peak and Carbon Neutral” calls for a systematic, strategic and holistic task for more financial institutions and increasing involvement of the entire financial industry. In 2016, the framework for green finance was laid down in the Guiding Opinions on Establishment of Green Finance System, published by seven regulators. In May 2021, the PBOC, the National Development and Reform Commission (NDRC) and the China Securities Regulatory Commission issued the Catalogue of Projects Supported by Green Bonds (2021), which unified the scopes and standards for recognising green finance projects. In the meantime, the PBOC published the Plan for Assessing Green Finance of Banking Financial Institutions, requiring a green finance-based key performance indicator in reviewing onshore banks’ performances.

Carbon emission exchanges across the nation are about to be optimised and integrated. The interest in utilising carbon emission assets as collateral grows significantly and rapidly. The Guangzhou Futures Exchange was inaugurated in April 2021, with a main goal of establishing a derivative market for carbon emission rights. Shenzhen has been authorised by the central government to actively explore the introduction of various types of overseas funds to invest in, and orderly exit from, domestic climate projects. The NDRC also recently encouraged enterprises to issue green bonds overseas. As such, it can be concluded that the green finance market and related legal fields are expected to expand drastically and embrace a promising and prospective future.

King & Wood Mallesons

18th Floor
East Tower
World Financial Center
No.1 Dongsanhuan Zhonglu
Chaoyang District Beijing 100020
P. R. China

+86 10 5878 5588

+86 10 5878 5566
Author Business Card

Law and Practice


King & Wood Mallesons is at the forefront of this highly evolving market, from navigating and shaping regulatory changes to implementing innovative finance solutions for the market’s most complex and sophisticated transactions. It has one of the largest and most comprehensive teams handling banking and finance transactions across Greater China, with 30 partners and more than160 associates providing the latest industry insight and know-how. The team offers comprehensive legal services across the full spectrum of financial products, including aircraft/vessel and other asset financing/leasing; project financing; M&A financing; trade finance; real estate financing; pre-IPO and privatisation financing; syndicated loans; debt capital markets; asset-backed securitisation and structured finance; establishment/M&A/bail-out of financial institutions/platforms; non-performing assets sale and purchase; debt restructuring (out of court); derivatives; financial technology; bank card clearing; and third-party payments.

Trends and Development


King & Wood Mallesons is at the forefront of this highly evolving market, from navigating and shaping regulatory changes to implementing innovative finance solutions for the market’s most complex and sophisticated transactions. It has one of the largest and most comprehensive teams handling banking and finance transactions across Greater China, with 30 partners and more than160 associates providing the latest industry insight and know-how. The team offers comprehensive legal services across the full spectrum of financial products, including aircraft/vessel and other asset financing/leasing, project financing, M&A financing, trade finance, real estate financing, pre-IPO and privatisation financing, syndicated loans, debt capital markets, asset-backed securitisation and structured finance, establishment/M&A/bail-out of financial institutions/platforms, non-performing assets sale and purchase, debt restructuring (out of court), derivatives, financial technology, bank card clearing, and third-party payments.

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