The National Development and Reform Commission of the PRC (NDRC) published the Administrative Measures for the Review and Registration of Medium and Long-Term Foreign Debt of Enterprises (企业中长期外债审核登记管理办法) (Fa Gai Ling [2023] No 56) on 5 January 2023 (the “Measures”). Compared with the previous circular published by the NDRC in 2015, the new Measures strengthen the requirements on foreign debt by, inter alia:

• introducing the concept of “indirect foreign debt” which encompasses round-chip companies whose main assets are located on the mainland; this raises questions about whether foreign fund managers would require NDRC approval for borrowing offshore to invest in mainland assets; and
• stipulating a three-month period for NDRC review, contingent on satisfactory application documentation; as NDRC approval is mandatory before the first drawdown, timing has emerged as a significant concern, particularly for refinancing deals, so parties involved should factor this duration into their financial planning.

China’s real estate market has not recovered as expected. Although existing financial measures appear favourable on the surface, they disproportionately benefit top-tier real estate firms. Consequently, the broader financing environment for the real estate sector remains decidedly challenging. Moreover, several real estate enterprises are on the brink of delisting, exacerbating a vicious cycle caused by a lack of market confidence and cash flow difficulties. Against the backdrop of ongoing industry risks and with market confidence not yet fully restored, the majority of private real estate enterprises still face challenges regarding difficult and expensive financing, which remain to be addressed.

In a global context, the U.S. Federal Reserve has repeatedly increased the dollar interest rate over the past year. In contrast, the People’s Bank of China has been actively reducing the RMB interest rate to stimulate the domestic economy. Consequently, there has been a notable shift away from offshore financing in favour of onshore RMB loans.   

In loan transactions, specific situations (such as involvement in sanctioned industries or the possibility of individuals controlling parties on sanction lists) are given heightened attention. Additional due diligence is often conducted to ensure that potential risks associated with relevant transactions are fully identified and assessed. Lenders shall also pay closer attention to sanction-related representations and warranties clauses within loan documents.

The Ukraine war is also having an impact on currency exchange rates, especially for countries directly involved in or with significant economic exposure to the conflict. Fluctuations in exchange rates can influence the terms and costs of loans, especially for entities dealing with foreign currency-denominated debt.

During periods of heightened geopolitical tension, lenders might become more selective in approving loans. This could result in reduced credit availability for businesses and individuals. Lenders may prioritise loans with lower default risk or collateralised assets.

With the bounce back of the PRC economy, several PRC-incorporated companies have returned to the bond market and continue to sell successful deals in different currencies. Whilst high-yield debt issues have yet to become a vital alternative financing source within the domestic PRC market, the overseas markets (including Hong Kong) continue to see robust demand for PRC or PRC-sponsored issues.

The alternative credit industry offers a lot of opportunities but is also subject to more stringent supervision in the PRC, which may continue for a relatively long time. For example, the regulatory authorities have introduced a series of policies to encourage the development of consumer finance in the past few years. Favourable policies such as lowering the coverage ratio requirement will effectively improve consumer finance companies’ profitability and risk mitigation capabilities, and allowing consumer finance companies to carry out the transfer of credit income rights at the banking credit asset transfer registration centre will help them to further expand financing channels and business volume.

A similar trend has been observed in different kinds of alternative credit industries. The increase in financing demands of companies on the supply chain stimulates not only banks granting regular loans, but also factoring companies focusing on 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 confidence in the industry.

Several credit funds and other kinds of alternative credit providers have also participated in the direct foreign debt to be granted to companies located in China, or invested in the non-performing loan market.

Following the COVID-19 pandemic, both borrowers and lenders now tend to use more comprehensive forms of term sheets or commitment letters to avoid disputes or arguments during the documentation stage. Compared to the period prior to the COVID-19 pandemic, borrowers and lenders now have a deeper understanding of the establishment and application of the level of consent required for specific matters, grace periods used in undertakings and event of default clauses, force majeure and other similar carve-out clauses.

With the Civil Code of the PRC coming into force at the beginning of 2021, officially confirming the security nature of non-standard security (such as assignment of rights or subordination of inter-company loans), there is now more flexibility for relevant parties to negotiate the credit support arrangement and to be more creative in this area.

The PRC authority is stepping up efforts to promote the development of green loans. The green finance guidelines for the banking and insurance industries have been issued, requiring banks and insurers to:

• increase support for the green, low-carbon and circular economy;
• include ESG requirements into their management processes and comprehensive risk management systems;
• strengthen ESG disclosures; and
• improve relevant policies, mechanisms and process management.

Meanwhile, the regulatory body is actively fostering product innovation by advocating the expansion of green loan initiatives. Additionally, the authority is inclined to steer local lenders towards augmenting their allocation of resources for green loans.

Driven by policy encouragement, PRC banks are actively seizing the opportunities presented by the development of green finance, which has become a new growth point for them. Looking at the annual reports of various PRC banks, it is evident that green loans are experiencing rapid growth, with growth rates exceeding 30%, becoming a common trend. In addition to the high growth of green loans, banks are also introducing innovative green financial products and services. Simultaneously, banks are comprehensively advancing the development of green finance in terms of organisational structure, policy frameworks, and other aspects.

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

A foreign lender who makes a cross-border loan to a PRC company is not required to be licensed in the PRC. However, it is worth noting that:

• a PRC company that intends to borrow loans from a foreign lender must have a 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) registration with the NDRC.

On a related note, the People’s Bank of China (PBOC) and SAFE jointly published a regulation in February 2022 to govern offshore lending provided by PRC banks to offshore entities, which imposes a series of restrictions on lending limits, loan purposes, eligible borrowing entities, and data reporting requirements, etc.

There are no specific restrictions on the receiving of security or guarantees to foreign lenders. However, any security or guarantees granted by a PRC company to foreign lenders which is 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 PBOC and SAFE are the main authorities in charge of foreign exchange controls in the PRC. Generally, foreign exchange activities in the PRC are divided into two categories, namely current account activities and capital account activities.

Foreign exchange transactions relating to capital account activities (eg, borrowing from, and granting of 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 approval by 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 purposes and acquisitions. That said, the proceeds from loans or debt securities borrowed or issued by a PRC company outside the PRC shall in principle be used for the purposes falling 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 the agent may act for and on behalf of the principal(s). The concept of trust under the PRC law (which means that the settler entrusts his/her/its property rights to the trustee and allows the trustee to, according to the will of the settler and in the name of the trustee, administer or dispose of such property in the interests of a beneficiary or for any intended purposes) 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 required to effect such transfer. In general:

• a loan transfer will become effective between the transferor and the transferee from 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 from 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, partial transfer of a loan by banks is currently not permitted) and foreign exchange control (eg, a PRC lender may not transfer the loans made to a PRC company to a foreign lender without the approval of SAFE).

PRC law does not prohibit a borrower or sponsor from buying back debt. Debt buy-backs are subject to the regulatory requirements and foreign exchange control on loan transfers. Contractual restrictions are often put in place where the buy-back is partial only.

In the case of the acquisition of a company listed in the PRC, the financial consultant of the buyer is required by regulators to ensure that the buyer has the capability 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 the public acquisition finance transactions. There is also no uniform standard regarding the “certain funds” provisions in the acquisition finance transactions in the PRC. The “certain funds” provisions could be agreed between the borrower and lender by themselves. In practice, loan documents will often include certain funds provisions which are comparable to those to be found in the documentation of an international acquisition finance transaction.

Following the promulgation of the NDRC Measures as mentioned above, from the legal documentation perspective, we should pay attention to the update of the terms (including, without limitation, definitions, representations and warranties, undertakings, conditions precedent and conditions subsequent) of the facility agreements. According to the Measures, lenders will require that borrowers obtain a Registration Certificate as a condition precedent for drawdown, and will impose more specific obligations to ensure borrowers’ compliance with the Measures.

After a decade of preparation, the LIBOR transition has entered its final stage. The end of June 2023 marked the final major milestone in the LIBOR transition with the end of the remaining USD LIBOR panel. A large number of loan agreements that used to apply LIBOR have also modified their interest rate benchmarks in the form of amendment and supplemental agreements.

Under PRC law, the rate of interest that can be charged by the lender that is not a financial intuition or 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 institutions or quasi-financial institutions with a lending licence.

The PRC has a range of laws and regulations governing financial contracts and their disclosure, including but not limited to:

Securities Law

The Securities Law of the People’s Republic of China (中华人民共和国证券法) governs the issuance and trading of securities in the PRC. It includes provisions related to disclosure requirements for publicly-traded companies. These companies are required to disclose financial information, business operations, risks, and other relevant information to ensure transparency for investors.

Stock Exchanges

Companies listed on Chinese stock exchanges, such as the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE), must adhere to specific disclosure requirements set by these exchanges. These requirements include regular financial reporting, announcements of major events, and more.

Interbank and OTC Markets

In China, there are also interbank and over-the-counter (OTC) markets where financial products are traded. Depending on the type of financial contract and market, there may be specific disclosure requirements set by the regulatory authorities.

Banking and Insurance

Financial contracts in the banking and insurance sectors are subject to regulations from China’s National Financial Regulatory Administration (NFRA). These regulations include provisions for disclosure of financial information, terms and conditions of financial products, and risk-related information.

Online Finance

In recent years, China has also seen a growth in online finance and fintech platforms. These platforms are subject to specific regulations aimed at ensuring transparency, consumer protection, and preventing financial risks.

Foreign Investment

Foreign investors engaging in financial contracts in China should also be aware of any specific regulations and disclosure requirements that apply to their investments.

Anti-Money Laundering (AML) Regulations

Financial institutions operating in the PRC are also subject to AML regulations, which may include disclosure requirements related to suspicious transactions and customer due diligence.

No withholding tax is payable in the PRC in respect of payments of principal, interest or other payments made by a PRC company to lenders incorporated or organised in the PRC.

However, PRC income tax (currently set at rate 10%), value added tax (currently set at rate 6%) and surcharges are applicable to payment of interest and fees made by a PRC company to non-PRC resident lenders, subject to adjustment by applicable treaty. Such taxes would be withheld by the PRC company acting as the obligatory withholder on the payments to the non-PRC resident lenders.

In the case of loans extended by a PRC resident lender to a PRC company, value added tax (currently set at 6%) along with associated surcharges will be levied on interest and fee payments, and the PRC resident lender is obligated to pay PRC income tax (currently set at 25%) on an annual basis for its profits. Concerning interest and fee payments made by a PRC company to non-PRC resident lenders, the taxes 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 loan agreements 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).

As set out in 4.1 Withholding Tax, interest and fees paid to foreign lenders will be subject to PRC income tax, value-added tax and surcharges, by way of withholding. As a mitigation measure, a tax indemnity clause will be incorporated into the loan documentation.

Whether or not a lender is a non-money centre lender will not result in differences in terms of tax considerations in the PRC.

Overview

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, deposits, bank accounts, receivables, etc.

Perfection Requirements

Mortgage over immovable assets

A 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

A security interest 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

A 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 a pledge over financial instruments, 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 a pledge 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 the Credit Reference Centre to register the following types of security:

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

Timing

Although there is no specific time requirement for all 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, ranking in priority and right 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, although such registration 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;
• the mortgagor is declared insolvent or dismissed;
• any event as mutually agreed by the parties to realise the mortgage; and
• other circumstances that have a severe impact on the realisation of the secured indebtedness.

Exception to Priority in Ranking

Where an asset falling 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, where any mortgage or similar security is created over those assets to secure the consideration or rent payable and is registered within ten days after the delivery of that asset, the following interests 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 by way of lease.

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.

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

Special Requirement for Listed Company

For a listed company incorporated in the PRC (or any of its material subsidiaries that have been disclosed), the provision of security and guarantees 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 guarantees in legal proceedings.

Special Requirement for State-Owned Enterprises

Where a state-owned enterprise is to provide security or guarantees for its subsidiaries, it may be subject to a requirement that the portion of liabilities secured or guaranteed by it does 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 SASAC or its local branch.

On 9 October 2021, SASAC promulgated the Circular on Strengthening the Administration of Central Enterprises’ Providing Guarantee and Security (the “Circular”) to regulate the provision of guarantees and security of central enterprises. In this Circular, it is made clear that:

• An implicit guarantee (co-borrowing contract, deficiency supplement commitment, comfort letter, etc) shall also be regulated as a guarantee, insofar as it has the effect of a guarantee.
• Central enterprises are strictly prohibited from providing guarantees and security in any form to secure the obligations of enterprises that:
1. are outside the group and have no equity relationship with such central enterprise;
2. have entered into reorganisation or bankruptcy proceedings;
3. are insolvent;
4. have been suffering losses for no fewer than three consecutive years; and
5. are financial institutions.
• Central enterprises should strictly control the extent of guarantee and security provision so that such provision does not exceed 40% of the consolidated net assets of the group. Furthermore, for any individual central enterprise or any of its subsidiaries, the guarantee and security provision limit is capped at 50% of the net assets of such enterprise. The total provision of security and guarantees for the financing of an enterprise included in the annual debt risk control scope of SASAC shall not increase compared with the previous year.
• Central enterprises should strictly control the provision of guarantees/security that exceeds the proportion of shares held. In principle, a central enterprise can only provide a guarantee or security to its subsidiaries and enterprises in which it holds shares strictly in accordance with the proportion of shares it holds in such enterprises. Where it is necessary to exceed the proportion, this shall be reported to the board of directors of the group for approval. Also, for the guaranteed/secured amount exceeding the proportion of shares, counter security with sufficient and realisable value shall be provided by a minority shareholder or a third party through a mortgage, pledge or other means.

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.

There is a particular requirement for the provision of cross-border security or guarantees – please see 6.4 A Foreign Lender’s Ability to Enforce Its Rights.

Security will be released upon:

• the discharge of secured liabilities;
• the realisation of the security;
• the secured creditor waiving its interest over the collateral; or
• the occurrence of 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 the security interest, based on which the security provider can request the relevant registration authority to process the deregistration.

Competing Security Interests

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 interests have been registered;
• where some security interests have been registered while some remain unregistered, the registered interests shall rank in priority to the unregistered ones; and
• where no registration has been made, all interests 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 both a mortgage and pledge are created over a collateral, the priority will be determined by order of registration of the mortgage, and 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, the lien will rank ahead of the mortgage and pledge.

Subordination

Under PRC law, contractual subordination may be reached by agreement between all the creditors. In its simplest form, the senior creditors (typically the lenders), the junior creditors (typically the shareholders of the borrower) and the borrower (if required by the creditors) will enter into an inter-creditor agreement or a subordination agreement. This agreement shall stipulate 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 that indebtedness shall be subordinated to the indebtedness owed to the senior creditors and to the right of the senior creditor in respect thereof.

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

Under PRC law, if the debtor fails to perform its due debt, the creditor is entitled to retain movable properties of the debtor that have been legally possessed by it and create liens over such movable properties.

In practice, a lender may possess the pledged assets of the pledgor under a pledge provided in favour of the lender. But whether the lender may create liens over such pledged assets in favour of other obligations owed by the same debtor to such lender will be subject to the specific circumstances and the position taken by the PRC courts.

Upon the non-payment by a debtor or events to realise a security interest as agreed by the parties in the security documents, the secured lender may take the following measures to enforce its security interest, without recourse to the PRC court:

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

If the proceeds obtained from the abovementioned steps exceed the secured indebtedness, the portion that exceeds the secured indebtedness should be attributable to the security provider.

Special Procedure on Enforcement of Security Interest

PRC law provides for a special procedure on 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 with 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 (regarding the secured indebtedness, or whether any event of default has occurred, etc), the application of the Realisation Procedure will be dismissed and the court will inform the parties to settle their dispute by initiating a litigation procedure.

Restrictions

Lenders may be faced with the following restrictions in the enforcement of a security interest.

Ranking in priority

Besides the limitations set out in 5.7 Rules Governing the Priority of Competing Security Interests, if the collateral has been mortgaged to other beneficiaries with a prior ranking, the enforcement of security may be subject to the consent of the beneficiaries with a prior ranking, even though the relevant collateral has already been seized by the beneficiary applying for enforcement.

Enforcement of security over construction in progress

The creditor rights of other parties are generally subordinated to payments owed to contractors for construction works.

Choice of Law

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

Submission to a Foreign Jurisdiction

Generally speaking, the parties are free to submit a dispute related 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, a Sino-foreign co-operative exploration or the 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 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 Judgment

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

• the relevant foreign judgment must be final and effective;
• pursuant to applicable foreign laws, the court rendering the judgment must have jurisdiction over the case;
• pursuant to applicable foreign laws, the litigation procedure conducted in the foreign court must be fair and legitimate – for instance, the respondent has been duly served and is given the opportunity to be heard, etc;
• conflicting judgments do not exist – PRC courts will not hear any case with identical parties relating to 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
• recognition and enforcement of such judgment do 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 transactions have been duly completed, including but not limited to the following (as applicable).

Foreign Debt Registration

A PRC enterprise is generally required to register its offshore borrowing or offshore debts issue with SAFE no later than three business days prior to utilisation. Any nonfinancial enterprise incorporated in the Greater Bay Area may apply for once-for-all foreign debt quota registration with SAFE to avoid one-by-one registration with SAFE, subject to meeting relevant requirements from SAFE.

NDRC Registration

According to the Administrative Measures for the Examination and Registration of Medium and Long-term Foreign Debts of Enterprises issued by the NDRC on 5 January 2023, a PRC enterprise is required to conduct registration with the NDRC in respect of offshore borrowing or offshore debts issued by it and any offshore entity or branch controlled by it, and such NDRC registration requirement also applies to the circumstance where a PRC enterprise indirectly borrows offshore debts from overseas, that is, when an enterprise, whose main business activities are conducted within the PRC, issues bonds or borrows commercial loans overseas in the name of an enterprise registered overseas, based on the equity, assets, earnings or other similar rights and interests of enterprises incorporated in the PRC (in each case with a tenor over one year, exclusive of being exactly one year).

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 from the date of the relevant security or guarantee agreement. Although failure to complete this registration will not impact the validity of the security and guarantee agreement, the outbound remittance of proceeds obtained through the enforcement of such security or guarantee may be restricted without such registration.

When the application for insolvency has been accepted by the court, the following may occur in the exercise of the lender’s rights:

• automatic acceleration of debt: all the debt of the insolvent company that remains outstanding shall immediately become due and payable; and
• calculation of the interest ceases: upon acceptance of the insolvency application by the court, the calculation of the interest of all the debt shall cease immediately.

If a security provider is involved in a judicial reorganisation procedure, the enforcement of the security interest will be suspended, unless the secured asset is likely to be damaged or its value might be significantly reduced, or there are other circumstances that will jeopardise the creditor’s rights.

Secured Indebtedness

A secured creditor who has a 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

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:

• payments to employees, including wages and compensation owed;
• 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 made on a pro rata basis.

How long it takes to complete a company’s insolvency process depends on various factors such as the company’s debt situation, the complexity of the relationship between creditors and the company, and to what extent the creditors and the company could co-operate. In practice, it may take several months to several years to complete the insolvency process.

Under PRC law, if an enterprise is unable to repay its due debts, and its assets are insufficient to repay all its debts, or it is clearly insolvent, or it is highly likely that it will become insolvent, the enterprise may enter reorganisation in accordance with the relevant laws. Both the enterprise and the creditors may directly apply to the PRC court for the enterprise’s reorganisation.

If the PRC court determines that, upon its examination, the application for reorganisation complies with the relevant legal provisions, it will rule on the enterprise’s entry into reorganisation and make an announcement. The reorganisation procedures generally include the following steps:

• convening the creditors meeting;
• submission of the draft reorganisation plan by the enterprise or the administrator to the PRC court and the creditors meeting;
• approval of the reorganisation plan;
• implementation and supervision of the reorganisation by the administrator; and
• submission of a supervision report to the PRC court upon completion of the reorganisation.

Restriction on Separate Settlement

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

Revocation by the Insolvency Administrator

If the insolvent company does any of the following within one year prior to the date the court accepts the insolvency application, the insolvency administrator may apply to the court for revocation:

• transfers its assets without any consideration;
• sells its assets at an obviously unreasonable price;
• provides security for an unsecured indebtedness;
• makes early redemption on undue liabilities; or
• waives 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 since the 1990s.

The public-private partnership (PPP) model is currently the most popular model in the project finance market in the PRC. Based on the data disclosed in the National PPP Information Platform, as of 31 December 2022 there were 14,038 PPP projects in the database nationwide, with a total investment of RMB16.62 trillion, covering 19 sectors, including energy, transportation, water resources, affordable housing, tourism, medical care and public health, education and government infrastructure.

Modes of PPP Transactions

There are four modes of PPP in the PRC:

• BOT (build–operate–transfer);
• BOOT (build–own-operate–transfer);
• BTO (build–transfer–operate); and
• BOO (build–own-operate).

BOT has long been the most widely adopted mode. These modes will be used according to the repayment sources of projects, as follows:

• 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 subsidy; and
• BOO is recommended by the NDRC for non-profit projects, accommodated with procurement by the government.

BTO 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 operation, such as electricity, water supply and public transportation, in which the franchisee will be selected through a formal tender process or competitive negotiations. The NDRC recommends that the PPP mode should be the first choice for the construction of new municipal engineering and urbanisation pilot projects.

In the PRC, PPP transactions are under the supervision of the NDRC, the Ministry of Finance and other regulatory authorities based on the nature of each project, including the Ministry of Housing and Urban-Rural Development, the Ministry of Transport, the Ministry of Water Resources and the PBOC.

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 limitations due to its location and industry.

As set out in 6.2 Foreign Law and Jurisdiction, under PRC law, only contracts connected to foreign-related transactions may choose a foreign law as the governing law, provided that such choice of law does not contravene the mandatory requirements under PRC laws and does not jeopardise the public interest of the PRC.

Also, the parties are generally free to submit a dispute related 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. Under PRC law, disputes arising from construction contracts shall be subject to the exclusive jurisdiction of the PRC court in the place where the relevant real property is located, unless the parties choose to submit such disputes to arbitration in the relevant agreement.

Under PRC law, land is owned by the state or peasant collective, and no entity or individual is allowed to occupy, trade, or illegally transfer land in any other manner. However, the right to use land can be transferred in accordance with relevant laws, and foreign companies, other organisations and individuals, unless otherwise prohibited by laws, may obtain land use rights upon satisfaction of the relevant requirements stipulated by law.

Water resources are also owned by the state in the PRC, and relevant entities shall apply to the water administrative department or river basin management authority for a water use permit and pay corresponding fees to obtain the right to use water.

The first issue a foreign investor should 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 the NDRC and the Ministry of Commerce will issue and update a list of industrial sectors and business types that are prohibited to foreign investors or that restrict foreign control. According to the latest Negative List promulgated by the NDRC and the Ministry of Commerce in 2021, such prohibited sectors include the prospecting and mining of rare earth, radioactive minerals and tungsten, etc. Some areas restrict foreign control – for example, 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 sponsors instead of only on the project assets and revenues. When assessing the bankability of the project, the investors should therefore conduct a thorough and comprehensive risk analysis to properly allocate the risks in the transaction documents.

The most traditional financing sources of project finance transactions are term loan facilities provided by a single institution or a consortium of policy banks, commercial banks or other financial institutions. In the past few years, participants in the project financing market have become more diversified, with social security funds, insurance funds and other public funds being permitted to be involved in project financing through debt, equity investment or otherwise. Meanwhile, the project owners of large-scale infrastructure projects are considering using more sophisticated structured financing instruments such as project revenue bonds, Green Bonds, Green ABS and REITs as alternative financing sources.

In general, financing on all types of projects will be subject to meeting debt-to-equity ratio requirements (no higher than 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 owned exclusively by the state, including minerals, oil and gas. Relevant permits and licences are required for exploiting, acquiring and using such natural resources.

Export of Natural Resources

Under PRC law, export control is administered through a dual mechanism: quota administration and export licensing. Certain goods are subject to quantity-based restrictions. These goods can only be exported up to specified quota limits. Other goods subject to export restrictions require an export licence. The goods subject to export restrictions are regulated under the list of goods subject to a quota and the list of goods that require an export licence, which are published by the Ministry of Commerce on an annual basis.

According to such lists, natural resources including coal, oil and various rare minerals cannot be exported without complying with relevant requirements.

Responsible Regulatory Bodies

The Ministry of Ecology and Environment (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 applicable to projects in the PRC are the Environment Protection Law, the Environmental Impact Assessment Law and the Fire Protection Law. Depending on its nature, a project in the PRC may also be subject to legislation on air pollution, sustainable development, waste management, water protection, soil protection, noise pollution, etc.

As for health and safety issues, 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. Based on the nature of a project, certain sector-specific laws and regulations may also apply.