Debt Finance 2026 Comparisons

Market Overview

In 2025, the incremental total social financing in China reached approximately CNY35.6 trillion. During the same year, new RMB loans amounted to CNY16.27 trillion, bringing the outstanding RMB loans at the end of the year to CNY271.91 trillion, which represents a year-on-year increase of 6.4%. The growth rate of loans to corporate and institutional entities recovered, and inclusive finance for small and micro enterprises grew rapidly. Conversely, the growth rate of real estate loans slowed down, while financial support for science and technology innovation enterprises remained strong.

Entering early 2026, financing maintained a strong start. In January 2026, new RMB loans reached CNY4.71 trillion, and the incremental social financing was CNY7.22 trillion. This included CNY976.4 billion in net government bond financing and CNY503.3 billion in net corporate bond financing, indicating a robust upward trend.

Loan Market

• Key sectors: Loans in key areas such as the industrial and manufacturing sectors, green initiatives, inclusive finance, elderly care and the digital economy maintained double-digit growth. According to the People’s Bank of China, this rate is significantly higher than the overall loan growth rate.
• Real estate: At the end of the third quarter of 2025, the balance of RMB real estate loans decreased by 0.1% year-on-year, dropping by CNY84 billion over the first three quarters. Specifically, the balance of development loans fell by 1.3% year-on-year, and personal housing loans decreased by 0.3%. This trend suggests that bank credit resources are increasingly shifting towards manufacturing, infrastructure improvements, green transitions and technological innovation, with the real estate sector’s contribution to loan growth weakening significantly.
• Funding costs: Policy interest rates and the Loan Prime Rate (LPR) were reduced in 2025. In May 2025, the one-year and over-five-year LPRs were lowered by ten basis points to 3.00% and 3.50% respectively, and remained stable for a period thereafter. In this environment, the overall financing cost for the real economy remains at a low level.

Bond Market

In 2025, China’s bond market operated smoothly with active trading. As of the end of 2025, the outstanding balance of bonds in custody was CNY196.7 trillion, and the annual cash bond market trading volume reached CNY425.3 trillion. Simultaneously, net government bond financing stood at CNY13.8 trillion, and net corporate bond financing was CNY2.4 trillion, indicating a higher proportion of government bonds in new financing.

The overarching trends in the bond market can be summarised as follows:

• Low interest rates: The ten-year government bond yield was 1.85% at the end of 2025, reflecting the continuation of a low-interest-rate environment.
• Narrowing spreads: The spread between ten-year and one-year government bonds, as well as the spread between AAA medium-term notes and government bonds, narrowed at the end of 2025 compared with the previous year. This demonstrates a clear market preference for high-grade assets.
• Active Panda bonds: The cumulative issuance of Panda bonds in 2025 reached CNY183.06 billion, with cross-border issuance and foreign participation continuing to advance.

• Loan market: The market is dominated by commercial banks (such as large state-owned banks, joint-stock banks, and city or rural commercial banks) and policy banks. These institutions provide capital and act as mandated lead arrangers or facility agents in syndicated loans.
• Bond market (issuance): Issuers typically arrange issuance through a lead underwriter. Intermediaries such as banks and securities firms both play significant roles, depending on the specific issuance market and type of bond.
• Bond market (investment): Institutional investors, including banks, insurance companies, wealth management vehicles and funds, constitute the primary buy-side force. Their risk appetite and duration preferences have a pronounced impact on pricing.
• Cross-border participation: Cross-border financing encompasses both domestic entities borrowing offshore funds (through foreign debt or cross-border loans) and foreign capital participating in the domestic bond market via mechanisms such as Bond Connect or the China Interbank Bond Market (CIBM) Direct scheme.

Between 2025 and early 2026, rising external uncertainties have led the market to place a greater emphasis on transaction certainty and risk management. The spillover effects of geopolitical tensions, coupled with global interest rate volatility, have prompted a more cautious approach to initiating and advancing certain cross-border financing and M&A projects. Consequently, transaction timelines now frequently incorporate buffer periods for internal approvals, funding arrangements and regulatory communications.

In practice, due diligence has increasingly focused on two primary areas:

• Compliance: Transaction parties are conducting more frequent compliance screenings of counterparties and funding pathways. This is accompanied by more granular verification of risks related to export controls and international sanctions.
• Supply chains: The proliferation of tariff and non-tariff barriers, combined with recurring trade frictions, has made the stability assessment of origin, logistics, and key raw materials or components a standard feature in cross-border transactions.

Looking ahead, it is anticipated that this heightened focus on stringent compliance scrutiny and supply chain resilience will persist for the foreseeable future.

The main types of debt finance transactions in the jurisdiction can be categorised as follows:

• Loans: These are predominantly structured as bilateral or syndicated loans. Depending on the intended use of proceeds, common variations include fixed asset loans (including project development loans), working capital loans and acquisition loans. Furthermore, trade and supply chain financing, alongside operating property-related financing, is frequently utilised in the market.
• Bonds: This encompasses debt financing instruments within the interbank market, such as medium-term notes, short-term commercial paper, super short-term commercial paper and private placement debt financing instruments. It also includes corporate bonds traded on the exchange bond market, as well as policy-driven products such as enterprise bonds.
• Asset securitisation and Asset-backed financing: This category primarily features asset-backed securities and asset-backed notes issued within the interbank market.
• Cross-border financing: These transactions include foreign debt and cross-border loans, which can be structured on a bilateral or syndicated basis. Additionally, the market frequently sees domestic securities/guarantees for offshore loans (commonly referred to as Nei Bao Wai Dai), onshore/offshore parallel facility arrangements and cross-border bond financings, such as indirect bond issuances by offshore subsidiaries and Panda bonds.

Common Forms of Bank Loan Facilities

Based on various classification criteria (eg, number of lenders, financing purpose and regulatory requirements), common forms of bank loan facilities in the Chinese market include:

• Bilateral and syndicated loans.
• Working capital loans.
• Fixed asset loans (including project development loans).
• Operating loans (including operating property-related financing).
• Project finance. This focuses on project cash flows and is frequently paired with account supervision and cash flow collection or distribution mechanisms. It may also incorporate limited shareholder support or credit enhancement arrangements tailored to specific project stages.
• Acquisition loans.
• Trade finance (eg, letters of credit, forfaiting, factoring and documentary bills).
• Credit enhancement instruments, such as bills, letters of guarantee and standby letters of credit.

Syndicated Bank Loans Versus Debt Securities

• Advantages of syndicated loans: These facilities offer highly negotiable terms, providing greater flexibility regarding guarantees, financial covenants, conditions precedent, and waiver and amendment mechanisms. They require relatively limited information disclosure, making them highly suitable for complex scenarios such as acquisition finance, project finance and restructuring. Furthermore, they allow for better alignment with phased drawdowns and the pace of fund utilisation.
• Disadvantages of syndicated loans: Transferability and secondary market liquidity are typically weaker compared with bonds. Additionally, the costs associated with transaction co-ordination can be higher.
• Advantages of bonds: Bonds provide access to a broader investor base, facilitating large-scale financing and bespoke maturity structures (particularly for highly rated issuers). They also generally benefit from better pricing and liquidity in the secondary market.
• Disadvantages of bonds: Bonds entail stricter information disclosure and ongoing compliance requirements, especially for public offerings. They are more sensitive to market windows and fluctuations in interest rates or credit spreads. Moreover, the co-ordination costs for amending terms or executing a restructuring are usually higher.

Types of Investors

• Bank loans: Participants predominantly include policy banks, large state-owned banks, joint-stock banks, city or rural commercial banks, and branches or subsidiaries of foreign banks. Depending on the specific transaction structure and regulatory requirements, corporate group finance companies may also participate.
• Bonds (exchange and interbank markets): Investors primarily consist of commercial banks (through proprietary trading and wealth management subsidiaries), insurance institutions, fund companies, securities asset management companies, trusts, and pension or corporate annuity funds. Additionally, certain types of offshore investors participate via channels such as Bond Connect or the CIBM Direct scheme, subject to market access rules and product eligibility.

Bilateral Loans

In bilateral loan transactions, the documentation is typically based on the lending bank’s internal templates. Transaction lawyers customise these templates in accordance with the agreed commercial terms to form the facility agreement. This is standardly accompanied by security or credit enhancement documents, such as guarantees, mortgages and pledges. Furthermore, account control or cash flow arrangement documents are prepared where applicable.

Domestic Syndicated Loans

For domestic syndicated loans, the documentation package generally encompasses a facility agreement, fee letters, and specific provisions or documents relating to the facility agent and transfer or accession mechanisms. Market practice frequently involves referring to industry-standard templates, with the most current being the 2025 syndicated loan standard template issued by the China Banking Association. These standard templates are subsequently adjusted to accommodate the specific transaction structure.

Cross-Border Syndicated Loans and Financing

Cross-border syndicated loans and financing often rely on international standard documents, such as those provided by the Loan Market Association or Asia Pacific Loan Market Association. These frameworks are modified locally based on the jurisdictions of the borrowers and guarantors, and the distribution of the relevant assets. The governing law is most commonly the law of the Hong Kong Special Administrative Region or English law.

When domestic borrowers, domestic guarantees or domestic asset security are involved, the relevant security documents may be governed by PRC law or structured as a parallel document package. These are concurrently prepared alongside foreign exchange and cross-border guarantee compliance documents, as well as necessary legal opinions.

Covenant Strength and Flexibility

The composition and diversity of the lender syndicate significantly influence the strictness and flexibility of loan covenants. When a facility involves numerous participants, such as in a syndicated loan with potential transfer requirements, the documentation tends to be highly standardised. Consequently, information disclosure and reporting obligations are meticulously detailed. Decision-making and governance mechanisms rely heavily on majority lender and facility agent structures. Furthermore, certain reserved matters may require unanimous or supermajority consent, which inherently increases the co-ordination costs for future amendments or waivers.

Conversely, bilateral loans or facilities provided by relationship banks may offer greater flexibility in their covenant packages. However, these lenders often offset this flexibility by imposing stricter controls over the use of proceeds, enhanced security and credit enhancement measures, or strict account supervision arrangements.

Transfer and Secondary Market Provisions

If the lender group includes foreign banks or there is a realistic expectation of secondary market trading, the finance documents will emphasise transferability. The provisions will precisely define eligible transferees, often utilising whitelists and blacklists to restrict assignments to competitors or sanctioned entities. Furthermore, these clauses typically stipulate:

• minimum transfer amounts;
• the borrower’s consent rights alongside specific exceptions; and
• confidentiality and Know Your Customer (KYC) obligations.

Recent regulatory developments and evolving market practices are increasingly standardising the mechanisms for transferring syndicated loan participations.

Compliance and Tax Requirements

The presence of foreign banks or cross-border investors usually results in the inclusion of comprehensive compliance and tax provisions. These lenders consistently push for robust clauses covering sanctions, anti-corruption and anti-money laundering, alongside extensive KYC checks. Additionally, the documentation will feature strict tax gross-up mechanisms and mandates for the delivery of specific tax forms.

Such lenders may also require extensive audit and inspection rights, coupled with undertakings ensuring compliance with cross-border data transfer regulations. Consequently, borrowers must allocate significantly more resources to maintain continuous compliance, manage ongoing information disclosure and adapt their internal processes throughout the life of the loan.

Foreign Debt and Cross-Border Financing

Cross-border loan documentation must accurately reflect the compliance pathways for foreign debt and cross-border financing in the PRC. This includes necessary registrations or filings with the State Administration of Foreign Exchange (SAFE) and quota arrangements under the macro-prudential management framework for cross-border financing, where applicable. The finance documents will specify the required procedures, completion timelines and consequences of a breach within the conditions precedent (CPs), representations, warranties and covenants. Furthermore, if the loan exceeds a one-year term and involves a foreign financial institution as the lender, the transaction structure may require review and registration with the National Development and Reform Commission (NDRC) regarding medium and long-term foreign debt.

Cross-Border Guarantees/Securities

When a transaction involves cross-border guarantees/securities, such as domestic guarantees/securities for offshore loans (Nei Bao Wai Dai), the documentation must incorporate specific mechanisms. Practitioners typically include mandatory provisions to ensure the timely completion of the requisite cross-border guarantee registrations with the relevant local authorities.

Corporate Authority and Guarantee Procedures

To comply with PRC company law regarding external guarantees, the finance documents will require the delivery of board or shareholder resolutions, alongside approvals for related-party transactions and external guarantees. The documentation mitigates risks associated with articles of association restrictions, defective authority and ultra vires actions through comprehensive representations, warranties, events of default, and legal opinions. Additionally, if the transaction involves listed companies or state-owned enterprises (SOEs), the CPs and ongoing covenants must incorporate specific requirements for information disclosure, internal approvals and regulatory compliance tailored to the exact nature of the entity.

Creation and Perfection of Security Interests

The documentation must explicitly detail the types of mortgages or pledges, the relevant registration authorities and the exact timelines for completion. Common security interests include real estate mortgages, movable property and rights pledges under the unified registration system, equity pledges and receivables pledges. Furthermore, the enforcement provisions are typically tailored to practical enforcement routes under PRC law. These provisions will define the trigger events and the methods of realisation, such as public auctions or sales, while ensuring smooth co-ordination with litigation, arbitration, asset preservation and enforcement procedures.

Tax Considerations

The payment of interest to offshore lenders necessitates careful consideration of PRC withholding tax and the potential application of double taxation treaties. Consequently, cross-border loan documents frequently include standard gross-up provisions, tax indemnity clauses and specific tax withholding mechanisms.

Data Compliance and Information Provision

The operational feasibility of providing information must be scrutinised against the PRC’s stringent data protection regimes. When drafting provisions related to due diligence, ongoing information undertakings and audit rights, practitioners must carefully assess whether the cross-border transfer of data and personal information fully complies with the relevant domestic regulatory requirements.

Typical Guarantee and Credit Enhancement Arrangements

In corporate finance, it is standard market practice for parent companies or controlling shareholders to provide joint and several liability guarantees. Guarantees from material subsidiaries are also frequently incorporated to ensure the lenders have recourse to the key operating entities and primary sources of cash flow.

In project finance, the security package primarily focuses on obtaining control over the underlying project assets and their generated cash flows. This structure is sometimes supplemented by shareholder credit enhancement measures, such as completion support guarantees, particularly during the construction phase of the project.

Types of Assets

The typical asset classes utilised as collateral in the PRC include the following:

• Real estate: Land use rights, buildings and construction-in-progress, subject to the development stage of the project and specific local registration conditions.
• Movable property: Machinery, equipment, vehicles and inventory.
• Equity: Pledges over equity interests in domestic companies.
• Receivables and contract rights: Trade receivables, rental income, and project toll or revenue rights. These are generally linked to specific collection pathways, cash sweeping and account supervision arrangements.
• Accounts and cash flow rights: Collection accounts, supervised accounts and debt service reserve accounts. In practice, a “control” effect over these assets is achieved through account control agreements, fund sweeping and entrusted payment mechanisms.
• Cash collateral: Margin deposits and pledges over certificates of deposit.
• Intellectual property and other rights: Patents and trade marks, alongside shareholder loan receivables and insurance policy rights.

Types of Security

The primary security instruments utilised in the PRC market are:

• Mortgages: Mortgages over real estate and, where legally permissible, construction-in-progress.
• Pledges: Pledges over equity interests, receivables, movable property, equipment, certificates of deposit, and deposits.
• Unified security over movable property and rights: The Unified Registration and Publicity System for Movable Property Financing covers movable assets (such as inventory and equipment) and specific categories of rights. It establishes opposability against third parties and determines priority rankings through a centralised public registration process.
• Cash flow control arrangements: These encompass account control agreements, collection instructions, entrusted payment mechanisms and closed-loop fund management systems.
• Security agency arrangements: Commonly used in syndicated loans, a security agent holds and manages the security interests on behalf of the wider lender syndicate. The finance documents strictly govern the enforcement, recovery and distribution mechanisms.

Formalities and Perfection Requirements

• Corporate authorisations: Guarantors, mortgagors and pledgors must obtain the requisite corporate approvals, including board or shareholder resolutions, in strict accordance with their articles of association. Furthermore, necessary external approvals or filings must be completed. In cross-border transactions, this includes the registration of domestic guarantees for offshore loans (Nei Bao Wai Dai) with the relevant authorities.
• Registration and perfection: Perfection under PRC law is predominantly achieved through registration and public notice. Real estate mortgages must be registered with the relevant local real estate registration authorities. Equity pledges are typically registered with the local branch of the State Administration for Market Regulation. Security over movable property, accounts receivable and specific rights is perfected by filing on the Unified Registration and Publicity System for Movable Property Financing, which ensures public notice, opposability and priority.
• Notification and confirmation: For pledges over receivables and contract rights, lenders routinely require the delivery of formal notices to the underlying debtors. To enhance enforceability and recovery certainty, these arrangements are often paired with formal confirmations of collection pathways and strict contractual prohibitions against set-off or unapproved contract amendments.

Agent Concepts and Practice

In syndicated loan transactions, the appointment of a facility agent or security agent is a highly prevalent market practice. Under PRC law, practitioners can rely on the statutory agency rules set out in the PRC Civil Code, combined with robust contractual arrangements, to officially empower the facility agent. This legal framework grants the agent comprehensive authority over administrative notices, payment collections, voting mechanics, the enforcement of security and the distribution of recovered funds.

It is critical that the finance documents clearly operationalise the agent’s exact authority, enforcement triggers, majority voting thresholds and reserved matters. Furthermore, the mechanisms for asset disposal, recovery distribution and cost compensation must be explicitly drafted. These contractual provisions must align seamlessly with local security registration practices and the legal qualifications required for an entity to enforce security. This meticulous alignment prevents administrative or judicial obstacles caused by ambiguity regarding the acting entity during the registration or enforcement phases.

Financial Assistance

The newly revised PRC Company Law, promulgated in 2023, formally introduced and clarified the regulatory framework governing financial assistance. Consequently, practitioners must conduct a highly rigorous assessment when structuring acquisition finance scenarios. It is essential to evaluate whether, when and under what specific conditions a target company and its subsidiaries may provide guarantees, security, financial support or asset arrangements to facilitate the acquisition of their own shares or controlling stakes.

If a transaction inherently involves such financial assistance, it must be carefully structured and scrutinised. Legal counsel must assess whether the proposed arrangements can be successfully structured to qualify for the explicit statutory exemptions provided under the revised PRC Company Law.

Guarantees by Special Entities

When dealing with specific types of corporate guarantors in the PRC, additional layers of regulatory compliance and corporate governance are required:

• Listed companies: For listed companies, beyond standard internal authorisations, lenders must strictly monitor statutory information disclosure and formal review procedures. This includes verifying board or shareholder meeting resolutions and official public announcements. Pursuant to relevant judicial interpretations, if a creditor fails to review a listed company’s public announcement regarding an external guarantee, the legal validity and enforceability of the guarantee itself may be severely compromised.
• SOEs: Guarantees provided by SOEs demand meticulous attention to state-owned asset supervision regulations and complex internal authorisation chains. Lenders must verify an SOE’s exact authority to grant external guarantees, applicable financial limits, the permitted scope of guaranteed parties, and the required hierarchy of approvals. Typically, an SOE is prohibited from providing a guarantee that exceeds its proportional shareholding in a subsidiary. In exceptional cases where a disproportionate guarantee is commercially necessary, it generally requires formal approval at the parent group level and the implementation of robust risk mitigation measures, such as counter-guarantees. Furthermore, practitioners must remain aware that central SOEs and local SOEs may be governed by entirely distinct external guarantee regulatory regimes.

In the PRC market, particularly within real estate project finance involving foreign real estate funds, the core function of an intercreditor agreement is to consolidate complex multi-creditor issues. These issues, which are otherwise scattered across various finance documents, security agreements and enforcement pathways, are unified into a cohesive set of governance and cash distribution rules.

Furthermore, intercreditor agreements serve as a crucial structural mechanism to address the legal and regulatory hurdles offshore creditors face in directly holding onshore security. Through these contractual arrangements, offshore lenders can effectively achieve indirect control over domestic collateral. While the precise role of an intercreditor agreement varies depending on the specific transaction type, its typical functions primarily include the following:

• Information sharing and concerted action: Intercreditor agreements precisely stipulate which party is authorised to act on behalf of the wider syndicate of creditors. This agent is singularly empowered to initiate acceleration, enforce security, commence litigation or arbitration, dispose of assets and conduct settlement negotiations. This centralised approach fundamentally prevents individual creditors from taking independent actions that could lead to conflicting enforcement, duplicative asset preservation measures or disorderly asset disposal.
• Voting mechanisms: The documentation explicitly defines the voting thresholds required for majority lender decisions. These collective decisions typically encompass loan acceleration, covenant waivers, term extensions, interest rate adjustments, security releases, and debt-to-equity or broader restructuring plans. Additionally, the agreement strictly delineates reserved matters that mandate unanimous creditor consent.
• Cash waterfall and recovery distribution: The agreement establishes a legally binding cash waterfall. This mechanism dictates the precise order of priority for payments across different classes of debt and outlines the strict sharing mechanisms for any recovered proceeds among the varied creditor classes.

Legal Subordination and Statutory Priority

In the PRC, the priority of debt settlement is primarily governed by the mandatory rules set out in the PRC Enterprise Bankruptcy Law and other relevant legislation. As a fundamental principle, contractual arrangements cannot override these statutory priorities. The statutory framework dictates the following strict hierarchy:

• Bankruptcy expenses and common interest debts: These obligations are generally paid as a statutory priority during the bankruptcy proceedings.
• Statutory priority claims: Employee-related claims, social insurance contributions and outstanding taxes are strictly mandated by the statutory framework to take priority over general bankruptcy claims.
• Specific statutory priority rights: Under certain specific conditions, claims such as the priority right of compensation for construction project costs may enjoy a statutory priority over the proceeds of the relevant property.

Contractual Subordination

Contractual subordination is typically achieved through intercreditor agreements. This mechanism is frequently utilised for the subordination of shareholder loans, mezzanine financing, and the design of cash waterfalls within multi-tiered or cross-border transaction structures. The primary function of contractual subordination is to internally reallocate recovered proceeds among the contracting creditors, rather than to alter the external statutory distribution priorities strictly applicable in a formal bankruptcy scenario.

Rights of Different Classes of Creditors

The specific rights and recovery prospects of different creditor classes vary significantly:

• Secured creditors: These creditors generally hold a significant advantage in terms of recovery. However, this advantage is critically dependent upon the flawless creation and perfection of the security interests, as well as the absolute clarity of the secured scope and the anticipated enforcement pathways.
• Unsecured financial creditors: These lenders rely predominantly on the contractual protections embedded within the loan documentation, such as negative pledges, financial covenants and cross-default provisions. In terms of settlement priority, they rank strictly as general unsecured creditors.
• Subordinated shareholder loans and related-party debt: These obligations are frequently designated as deeply subordinated within the contractual framework. Consequently, they face a substantially higher degree of uncertainty regarding recovery during bankruptcy or formal restructuring proceedings.
• Structural subordination: Within a corporate group structure, the creditors of a holding company are often economically subordinated to the creditors of the lower-tier operating or asset-holding subsidiaries concerning the recovery against those specific underlying assets.
• Derivative and hedging creditors: These creditors will typically assert their claims based on the termination netting mechanisms explicitly stipulated in their respective master agreements, such as those governed by ISDA, NAFMII or SAC derivatives master agreements, to accurately determine the final net claim.

Trigger and Notice

The enforcement process typically commences upon the occurrence of an event of default, as explicitly stipulated in the finance documents. In accordance with the contractual provisions, the creditor, facility agent or security agent must issue a notice of acceleration alongside a formal notice of security enforcement. These notices officially declare the immediate maturity of the outstanding debt and demand the immediate fulfilment of the guarantee or security obligations.

Consensual Enforcement

Following an event of default, the creditor may negotiate directly with the security provider to realise the security interests through consensual means. The parties generally agree to utilise one of the following methods:

• Sale or auction: The parties mutually agree to mandate an auction agency or independently sell the collateral, with the creditor retaining priority rights over the proceeds.
• Agreement to discount: The parties agree on a specific valuation of the collateral and subsequently transfer the ownership of the asset to the creditor to set off the outstanding debt.

Judicial Enforcement

If a consensual arrangement cannot be reached, the creditor must typically navigate a two-stage judicial enforcement process. The first stage involves obtaining a valid enforcement basis, while the second stage focuses on applying for compulsory enforcement:

• Obtaining a judgment or arbitral award: The creditor must initiate litigation before a court of competent jurisdiction or commence arbitration proceedings before the agreed arbitral tribunal. The objective is to obtain an effective judgment or arbitral award that legally confirms the debt and the creditor’s priority rights over the collateral. Prior to or during these proceedings, the creditor will routinely apply for property preservation measures. This involves requesting the court to seize, impound or freeze the secured assets to prevent any unapproved transfer or dissipation.
• Applying for compulsory enforcement: Upon securing an effective legal instrument, the creditor may formally apply to the court for compulsory enforcement. The court will subsequently initiate formal valuation and auction procedures. To ensure transparency and maximise the recovery value, courts predominantly conduct public disposals through established online judicial auction platforms. Following the deduction of enforcement and disposal fees, the recovered proceeds are distributed to the creditors in accordance with statutory priority rules.

Special Procedure for Realising Security Interests

For security interests where the facts are straightforward and the rights and obligations are clearly defined, such as standard mortgages or pledges, creditors may directly apply to the court for a ruling to realise the security rights in accordance with the PRC Civil Procedure Law. This constitutes a special non-litigation procedure, which is significantly faster and more cost-effective than standard litigation. However, if the debtor or security provider raises a substantive objection regarding the validity of the security or the quantum of the debt, the court will typically dismiss the application and direct the creditor to initiate standard litigation proceedings.

Notarised Debt Instruments

If the finance documents were subjected to a notarisation for compulsory enforcement upon execution, which is a common practice in trust loans or non-banking financings, an expedited route is available. Following an event of default, the creditor may directly apply to the notary public office for a certificate of enforcement. Armed with this certificate, the creditor can bypass the entire litigation or arbitration process and immediately apply to the court for compulsory enforcement.

Legal Basis and Principles

In the PRC, the recognition and enforcement of foreign court judgments are primarily governed by the PRC Civil Procedure Law and its related judicial interpretations. The core bases for judicial review include the following:

• International treaties: If the PRC and the jurisdiction rendering the judgment have concluded or acceded to a bilateral or multilateral treaty on judicial assistance, the PRC courts will apply the provisions of such treaty as a priority.
• Reciprocity: In the absence of an applicable treaty, the courts will conduct their review based on the principle of reciprocity.

Application and Jurisdiction

The applicant seeking recognition and enforcement must submit a formal application to the competent Intermediate People’s Court possessing the requisite jurisdiction over the matter.

Review Process

Upon accepting the application, the court will initiate a comprehensive review process. In accordance with the PRC Civil Procedure Law and relevant judicial interpretations, the court may typically refuse to recognise and enforce a foreign judgment under any of the following circumstances:

• Lack of jurisdiction: The foreign court lacks jurisdiction over the case. Specifically, this occurs if (i) the foreign court has no jurisdiction under its own laws, or despite having jurisdiction, there is no appropriate connection to the dispute; (ii) the jurisdiction violates the exclusive jurisdiction provisions of the PRC Civil Procedure Law; or (iii) the jurisdiction violates a valid exclusive choice of court agreement between the parties.
• Procedural defects: The respondent was not lawfully summoned, or despite being lawfully summoned, was not afforded a reasonable opportunity to be heard and present a defence. Furthermore, refusal applies if a party lacking the capacity to litigate was not properly represented.
• Fraud: The judgment or ruling was obtained by fraudulent means.
• Conflicting judgments: A PRC court has already rendered a judgment or ruling on the exact same dispute, or has already recognised a judgment or ruling rendered by a third-country court on the exact same dispute.
• Public policy: Recognition or enforcement would violate the basic principles of the laws of the PRC or prejudice state sovereignty, security or social public interests.

Ruling and Enforcement

Following the review process, if the PRC court issues a formal ruling to recognise the foreign judgment, the judgment will subsequently be enforced in strict accordance with the relevant enforcement provisions of the PRC Civil Procedure Law.

Arrangements With Hong Kong and Macao

It is crucial for practitioners to note that independent judicial assistance arrangements exist between Mainland and the Special Administrative Regions of Hong Kong and Macao. For instance, the Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters by the Courts of the Mainland and of the Hong Kong Special Administrative Region establishes a distinct framework. Consequently, judgments from these regions are governed by these specific bilateral arrangements rather than the general reciprocity principle applicable to foreign judgments.

Outside formal insolvency proceedings, the primary rescue and reorganisation mechanisms for distressed enterprises in the PRC market include Financial Institution Creditor Committees (FICCs), out-of-court debt reorganisations and pre-reorganisations.

Financial Institution Creditor Committees (FICCs)

In accordance with the Working Rules for Financial Institution Creditor Committees (Yin Bao Jian Fa [2020] No 57), financial institution creditors may establish an FICC for enterprises carrying substantial financial debt that significantly impact the broader financial market. The FICC functions as a consultative, self-regulatory and temporary organisation designed to facilitate co-ordination, information sharing and unified arrangements among creditors. Adopting a tailored approach for each enterprise, the FICC collectively deliberates on measures such as increasing, stabilising or reducing financing, alongside comprehensive reorganisation plans. This collaborative mechanism ensures that financial creditors form a cohesive front to effectively mitigate financial risks.

Furthermore, when significant issues arise during the establishment or daily operation of an FICC, relevant regulatory bodies – including the National Administration of Financial Regulation (formerly the China Banking and Insurance Regulatory Commission), the People’s Bank of China and the China Securities Regulatory Commission (CSRC) – are required to provide timely guidance and co-ordination. Industry self-regulatory organisations are also expected to actively support and co-operate with the FICC’s initiatives.

Out-of-Court Debt Reorganisations

Outside formal judicial proceedings, borrowers and lenders may engage in purely commercial negotiations to achieve a consensual debt reorganisation. These arrangements typically involve debt swaps, maturity extensions, debt-for-asset exchanges or debt-to-equity swaps.

Such out-of-court reorganisation agreements are binding only upon the signatory parties. Consequently, dissenting minority creditors who do not consent to the reorganisation plan retain their full legal rights to independently initiate litigation or apply for the compulsory enforcement of their claims and security interests.

Pre-Reorganisations

Pre-reorganisation serves as a hybrid mechanism bridging out-of-court reorganisation with formal in-court reorganisation. While the current PRC Enterprise Bankruptcy Law (2006) does not explicitly provide for this procedure, the revised draft of a proposed new PRC Enterprise Bankruptcy Law (released for public comment in September 2025) would introduce dedicated provisions from Article 100 to Article 102. These proposed articles would permit a debtor to conduct reorganisation negotiations with creditors and prospective investors prior to formally applying for court-led reorganisation. Once a reorganisation agreement or preliminary draft plan was reached, the debtor would be able to apply for formal reorganisation, seamlessly transitioning the preliminary agreement into the formal draft reorganisation plan. Alternatively, if statutory review requirements were met, the debtor could request the court to formally approve the preliminary plan and promptly terminate the reorganisation proceedings, thereby achieving a rapid, court-sanctioned reorganisation.

Enforcement of Security in Bankruptcy Procedures

Upon a court’s formal acceptance of a bankruptcy application, an automatic stay shifts all debt settlements and asset disposals into a centralised, collective judicial procedure. Consequently, the ability of individual creditors to secure specific repayments through independent litigation or enforcement actions is significantly limited.

Creditors holding valid, perfected security interests over specific assets generally retain priority repayment rights up to the total valuation of the collateral. However, within formal reorganisation proceedings, the enforcement of such security rights is frequently subject to strict procedural constraints. These temporary restrictions are typically imposed to facilitate the broader reorganisation plan, ensure the ongoing commercial operations of the debtor and manage co-ordinated asset disposals.

Claw-Back Risks

Under the PRC Enterprise Bankruptcy Law, a bankruptcy administrator is legally empowered to petition the People’s Court to revoke specific transactions involving the debtor’s property that occurred within one year prior to the court’s acceptance of the bankruptcy application. This claw-back mechanism is designed to recover dissipated assets for the bankruptcy estate, thereby ensuring equitable distribution among all creditors. Transactions susceptible to such revocation include:

• transfers of property without consideration;
• transactions executed at manifestly unreasonable prices;
• the provision of property security for previously unsecured debts;
• the early repayment of debts that have not yet matured; and
• the explicit waiver of creditor rights.

Furthermore, specific rules apply to preferential payments made within six months prior to the bankruptcy acceptance. If a debtor is already insolvent or explicitly lacks the ability to clear its debts in accordance with Article 2 of the PRC Enterprise Bankruptcy Law, the administrator may petition the court to claw back any repayments made to individual creditors during this period. An exception is granted only if it can be demonstrated that the individual repayment objectively benefited the debtor’s overall estate.

Order of Payment

Excluding secured claims (which are satisfied primarily from the proceeds of the specific collateral) and certain statutory priority rights (such as the priority right of compensation for construction project costs), the statutory order of payment in a PRC bankruptcy scenario is strictly mandated as follows:

• Bankruptcy expenses and common interest debts: These include the operational costs and liabilities incurred to maintain and advance the bankruptcy proceedings for the mutual benefit of all creditors. These obligations are paid on a priority basis as they arise.
• Employee claims: This critical category includes unpaid wages, medical and disability subsidies, etc. It covers the debtor’s mandatory contributions to basic pension and medical insurance schemes that must be allocated directly to employees’ personal accounts.
• Social insurance contributions and outstanding taxes: This tier covers any remaining social insurance premiums owed by the debtor (excluding those allocated to individual employee accounts) alongside all unpaid state taxes.
• General unsecured claims: Following the complete satisfaction of all preceding statutory priority tiers, any residual assets remaining within the bankruptcy estate are distributed to the general unsecured creditors on a strictly pro rata basis.

The primary tax considerations for debt financing in the PRC revolve around withholding taxes on interest and fees (including enterprise income tax, value-added tax (VAT) and related local surcharges), stamp duty and various structural issues.

Withholding Tax and Treaty Relief

The application of withholding tax fundamentally depends on the tax residency of the lending entity:

• Domestic lenders: When a domestic borrower makes payments of principal, interest or other associated fees to a domestic lender, these transactions generally do not trigger withholding tax. However, the interest and fees constitute taxable income for the lender, which must independently pay taxes in accordance with the applicable domestic corporate tax regime. Furthermore, such interest and service fees are generally subject to VAT and associated local surcharges.
• Non-resident lenders: Conversely, when a domestic corporate borrower pays interest and fees to a non-resident lender, the borrower is legally obligated to act as the statutory withholding agent. The common market practice typically dictates a 10% withholding enterprise income tax on such payments. Additionally, these payments are subject to VAT (commonly levied at a rate of 6%) alongside applicable local surcharges. If the non-resident lender qualifies for relief under an applicable double taxation treaty, preferential tax rates or exemptions may apply accordingly.

Stamp Taxes

• Guarantee and security documents: The execution of guarantee agreements and related security documents does not trigger any separate stamp duty or similar taxation under PRC law.
• Loan agreements: Loan agreements executed between financial institutions and corporate borrowers typically trigger stamp duty; however, interbank lending arrangements are expressly excluded from this requirement. The tax is generally levied at a statutory rate of 0.005% of the total loan amount. The precise application of this tax depends on the specific nature of the contract, the legal status of the executing parties, and the prevailing enforcement practices of local tax authorities.

Tax Indemnity and Gross-Up Provisions

In cross-border lending transactions, it is standard market practice to include tax indemnity and gross-up provisions within the facility documentation. These contractual mechanisms are specifically designed to address the allocation of withholding tax liabilities. By incorporating these clauses, lenders ensure that the economic burden of any mandatory tax deductions or withholdings is entirely transferred to, and borne by, the borrower.

Cross-Border Guarantee/Security

When a financing structure involves cross-border guarantee/security arrangements, practitioners must carefully address the registration and filing requirements required by the foreign exchange administrative framework. Specifically, in scenarios where both the creditor and the debtor are located offshore, but the guarantor or security provider is incorporated in the PRC, it is mandatory to complete the registration for domestic guarantee/security for offshore loans (Nei Bao Wai Dai). If a domestic company fails to obtain this crucial registration for its external guarantee, it will face regulatory hurdles, which can impede the efficiency and legality of remitting any enforcement proceeds offshore.

Foreign Debt Registration

Direct borrowings from offshore institutions are strictly subject to the regulatory framework governed by SAFE. This includes compliance with designated foreign debt quotas, the opening of specific foreign debt accounts, and supervision over the use and settlement of foreign exchange proceeds. Practitioners must note that the permissible foreign debt quota is not uniform; it varies significantly based on the borrower’s specific financial profile, the currency of the loan, and the tenor of the financing.

NDRC Medium and Long-Term Foreign Debt

Domestic enterprises that directly or indirectly borrow offshore debt instruments with a tenor exceeding one year must comply with the strict review and registration requirements imposed by the NDRC. This applies even if the borrowing is conducted through offshore entities controlled by the domestic enterprise.

Crucially, if an enterprise conducts its primary business operations within the PRC but issues bonds or incurs commercial loans offshore in the name of an offshore registered entity – relying on the equity, assets, earnings or similar interests of the onshore enterprise – this structure may constitute an indirect issuance of medium and long-term foreign debt. Such indirect issuances fall within the NDRC’s mandatory review and registration scope. The exact regulatory classification requires a meticulous assessment of the specific transaction structure, the corporate group architecture, and the underlying asset and operational profiles.

Licensing Requirements for Lending

Engaging in the business of lending on a continuous and for-profit basis requires an appropriate financial licence under PRC law. The most common licensed entities are commercial banks. If an unlicensed entity engages in the business of commercial lending, it faces substantial legal risks, as such activities may be deemed illegal and are subject to regulatory penalties.

Supervision of Financial Institutions

Licensed financial institutions conducting lending, bond underwriting or bond investment activities are subject to rigorous oversight by their respective financial regulators, such as the National Financial Regulatory Administration or the CSRC. Furthermore, these institutions must strictly adhere to the self-regulatory rules issued by industry associations, including the China Banking Association and the Securities Association of China. This dual-layered regulatory framework mandates strict compliance with requirements concerning credit concentration limits, related-party transactions, asset risk classification, information disclosure and product suitability.

Interest Rate of Private Lending

When drafting finance documents, practitioners must carefully assess the judicial enforceability of the comprehensive commercial arrangements, which encompass base interest, default interest, compound interest and various associated fees. PRC courts will only enforce these financial obligations within specific statutory limits. Most notably, in the context of private lending provided by non-financial institutions, any aggregate interest rate that exceeds four times the one-year LPR published by the central bank will not be supported or enforced by the PRC judicial system.

There are no other issues that the authors wish to highlight.