Banking & Finance 2025 Comparisons

In recent years, China’s economic policy has consistently centred on “maintaining stable growth and optimising the economic structure.” As the economy gradually recovers in the post-pandemic era, financing demands among various entities have shown significant divergence. On one hand, funding needs in the real economy ‒ particularly in manufacturing, technological innovation, and the green economy ‒ have remained strong. Notably, inclusive loans to small and micro enterprises (with credit lines of RMB10 million or less per borrower) have maintained an average annual growth rate of over 20%, with the outstanding balance reaching RMB36 trillion by the second quarter of 2025. On the other hand, the focus of China’s real estate loan policy in 2025 is to stabilise the housing market. The policy stance remains accommodative, aiming to lower the threshold and cost of home purchases while improving housing demand. Accordingly, in May 2025, policies were introduced to reduce the five-year and above loan prime rate (LPR), as well as the interest rates on housing provident fund loans, in order to ease the mortgage burden on households.

On the regulatory front, the People’s Bank of China (PBOC) has continued to advance the LPR reform, steadily reducing actual financing costs. In 2025, the one-year and over-five-year LPRs were lowered to 3.0% and 3.5%, respectively. Additionally, reserve requirement ratio cuts were employed to release long-term liquidity and enhance financial support. Meanwhile, the National Financial Regulatory Administration (formerly the China Banking and Insurance Regulatory Commission (CBIRC)) has intensified “penetrating supervision,” increasing efforts to regulate non-standard financing and shadow banking activities, thereby steering the banking sector toward more standardised credit practices. Furthermore, the “Measures for the Risk Classification of Commercial Banks’ Financial Assets,” which took effect in 2023, mandate that risk classification cover the entire lifecycle of credit assets. This has further prompted commercial banks to optimise credit resource allocation and reduce capital exposure to high-risk sectors. Overall, China’s loan market is currently undergoing a structural shift: credit resources are increasingly flowing toward the real economy and gradually concentrating in lower-risk areas.

Global conflicts have exerted a multifaceted impact on China’s loan market, which is mainly reflected in the following three aspects.

First, financing demand has become structurally differentiated. Industries heavily reliant on imports ‒ such as semiconductors, energy, and high-end manufacturing ‒ have faced supply chain fluctuations and rising raw material costs, leading to a significant increase in short-term liquidity needs. However, to mitigate risks, banks have simultaneously tightened credit approval standards, commonly requiring companies to provide proof of supply chain stability or incorporating risk premiums into pricing, typically resulting in interest rate mark-ups of 10% to 20%.

Second, cross-border loan contract terms have undergone significant optimisation. In loans related to cross-border trade, banks are increasingly incorporating “exchange rate risk hedging clauses” and “supply chain disruption force majeure clauses.” Some commercial banks have also introduced structured products such as “foreign exchange lock-in loans” to help companies mitigate financial risks associated with sharp currency fluctuations.

Third, credit allocation has shown imbalanced distribution across regions and industries. Banks have shown a greater inclination to extend credit to domestic demand-driven sectors ‒ such as infrastructure and consumer industries ‒ which are less directly affected by global conflicts, reflecting a strategic shift in credit policy toward structural risk hedging.

China’s high-yield market ‒ which primarily includes high-yield bonds, private credit, and trust plans, with returns generally ranging between 6% and 10% ‒ is playing an increasingly important complementary role within the broader lending system. Its influence on financing terms and market structure is mainly demonstrated in two ways.

First, this market effectively fills gaps left by traditional bank credit, providing crucial funding support particularly to small and medium-sized enterprises (SMEs) with weaker credit qualifications but high growth potential, such as tech start-ups and specialised, sophisticated “Little Giant” firms. These enterprises often struggle to meet banks’ traditional low-risk lending standards and thus have limited access to low-cost loans. The high-yield market serves as a vital alternative source of financing for them.

Second, the high-yield market has also driven innovation in financing instruments and contract structures. Products in this segment often incorporate more flexible terms, such as “performance-linked interest rates” (where rates can be reduced by 20%–30% upon achieving certain revenue targets) and “equity conversion options” (allowing creditors to convert part of their claims into equity in the event of default). These innovations have created competitive pressure on traditional bank lending practices, prompting banks to adopt reforms. Some city commercial banks have also launched “debt-to-equity linkage loan” products, which tie loan repayment to growth in the company’s equity value, thereby enhancing their appeal to high-growth potential enterprises.

In China’s loan market, alternative credit providers ‒ represented by leasing companies, commercial factoring firms, internet finance platforms, and private credit funds ‒ have expanded rapidly in recent years. Their growth has exerted two notable impacts on financing product design and market structure.

First, scenario-based financing innovations have continued to emerge with alternative lenders deeply penetrating vertical sectors, offering more targeted financing solutions. For example, leasing companies in the manufacturing sector widely adopt the “equipment pledge with instalment rental payments” model, with repayment terms extending up to five years, significantly longer than the typical three-year loans offered by banks. Meanwhile, commercial factoring firms provide “accounts receivable factoring” services, helping export-oriented enterprises to substantially shorten payment cycles, thereby reducing their reliance on working capital loans.

Second, under competitive pressure, traditional banks are accelerating service innovation and digital transformation. Some banks also adopted factoring-like financing models, introducing order-based credit products (such as “order loans”) that use expected revenues from purchase orders as the basis for credit, eliminating the mandatory requirement for additional collateral and significantly enhancing financing support for asset-light enterprises.

The banking and financial technology sector in China is continuously evolving in response to investor demands and borrower pain points, with progress mainly reflected in three directions.

First, the use of holding company (HoldCo) structures has become increasingly widespread. In merger and acquisition financing, borrowers often establish special purpose vehicles (SPVs) as holding platforms to effectively isolate project risks from parent company assets. To strengthen risk control, banks typically require such holding companies to provide “share pledges” to enhance control over underlying projects.

Second, the application of preferred stock financing tools continues to grow. Companies facing high debt levels ‒ such as those in capital-intensive industries undergoing state-owned enterprise reform ‒ are increasingly using preferred stock to replenish capital. This type of financing does not raise corporate debt-to-asset ratios, and its dividend payment arrangements offer flexibility, helping to alleviate corporate cash flow pressures.

Third, digital credit tools are accelerating in popularity. The banking industry widely applies big data and AI technologies, such as “tax and invoice-based loans” ‒ products that rely on corporate tax and invoice data. Some banks have also built "supply chain finance platforms" that integrate fund flow and logistics information from core enterprises and their upstream and downstream partners. This transforms traditional single-enterprise credit granting into comprehensive risk management and financing services centred around the entire industrial chain, effectively reducing financing barriers for small and medium-sized enterprises.

In the PRC, ESG principles, along with sustainability-linked loans (SLLs), are rapidly becoming integral components of the financial system. In recent years, the combined effects of sustained policy support, growing market demand, and proactive participation by financial institutions have accelerated the development of this field. ESG and SLLs in China have progressed, with several key characteristics.

• First, policy driving is evident. The PBOC has launched a “carbon emission reduction support tool”, providing an interest rate discount of 1.75% for qualified green loans. By the second quarter of 2025, the balance of green loans reached RMB42.39 trillion, with an increase of 14.3% year-on-year.
• Second, industry concentration remains high. SLLs are mainly concentrated in new energy (photovoltaic, wind power), energy conservation and environmental protection, green buildings, and other fields.
• Third, term design has been standardised. Most SLLs set “key performance indicators (KPIs) + sustainability performance targets (SPTs)”, such as “10% reduction in carbon emission intensity” and “renewable energy power generation accounting for 50%”. Enterprises that meet the standards can reduce the interest rate by 25-50 basis points (BPs), while those that fail to meet the standards need to pay a premium of 50-100 BPs.
• Fourth, information disclosure has been strengthened. The CBIRC requires banks to regularly disclose the use of funds and environmental benefits (such as carbon reduction) of green loans.

The Chinese government places great importance on green finance and ESG investment, introducing a series of policies to promote their development. For example, starting in October 2025, the “Green Finance Support Project Catalogue” added the categories of “Green Trade” and “Green Consumption,” further broadening the application of green finance, particularly in consumption and trade sectors. From a regulatory perspective, in 2022, the CBIRC issued the “Guidelines on Green Finance for Banking and Insurance Institutions,” which, for the first time, explicitly requires financial institutions to integrate ESG considerations into their overall risk management frameworks, thereby strengthening the strategic positioning of green finance. The PBOC extended the implementation period for low-carbon loan instruments to the end of 2027, providing low-cost financing support for enterprises and promoting carbon reduction and sustainable development projects.

Banking Institutions

Banks are required to obtain a financial licence and a business licence, with a business scope explicitly covering “loan issuance.” They must also comply with the “institutional entry” requirements set by the CBIRC ‒ for example, nationwide banks must be approved by the State Council’s financial regulatory authority, while city commercial banks and rural commercial banks must be approved by local financial regulators. In addition, banks engaging in specific types of financing (eg, green loans, cross-border loans) must meet corresponding special regulatory requirements ‒ for instance, green loans must be included in the PBOC’s “Carbon Emission Reduction Support Tool” programme.

Non-Banking Institutions

• Financial leasing companies and commercial factoring companies: must be registered with the local financial regulatory bureau, obtain a filing certificate, and maintain a minimum paid-in registered capital of RMB100 million. Their business scope must explicitly include “financial leasing” or “factoring services.”
• Microfinance companies: must be approved by the local financial regulatory bureau, obtain a microfinance company operating licence, and maintain a minimum paid-in registered capital of RMB50 million. Loan issuance is subject to restrictions, such as “single-customer credit not exceeding 10% of net assets.”
• Online financing platforms: must be filed with the PBOC or local financial regulatory authority as online lending information intermediaries and are required to establish third-party fund custody arrangements to ensure the segregation of client funds from platform funds.

Common Procedures

All institutions must register with the PBOC’s credit reporting system and submit lending data on a regular basis. When providing financing to overseas entities, prior approval from the State Administration of Foreign Exchange (SAFE) is required, along with the acquisition of a cross-border financing macroprudential management quota.

China implements a “risk-controlled progressive openness” policy for foreign lenders, with three core regulatory mechanisms.

• Prudential requirements: foreign banks must maintain a 12.5% capital adequacy ratio (0.5% higher than domestic institutions) with parental liquidity guarantees.
• Differentiated business management: retail RMB services require  three years of operation plus two years of profitability, with a minimum deposit of RMB500,000 (USD69,000). Cross-border loans are subject to sector-specific caps: real estate firms face a debt limit of 1x net assets, while tech firms can enjoy 2.5x net assets. A 2025 fast track scheme is introduced for strategic industries, including renewables and semiconductors.
• Data and compliance mandates: the Data Security Law mandates onshore data storage and cross-border transfers require cybersecurity reviews. Since 2024, foreign banks must use the PBOC credit system, and AML monitoring thresholds have been lowered to RMB500,000 (USD69,000).

Under PRC law, foreign lenders are not entirely unrestricted in receiving security or guarantees, with the main restrictions and impediments relating to regulatory requirements and procedural compliance in specific areas.

First, for cross-border guarantees, in accordance with the Administrative Provisions on Foreign Exchange for Cross-border Guarantees, if a guarantee involves foreign exchange receipts and payments (eg, foreign guarantees for domestic loans, domestic guarantees for foreign loans), the foreign lender must ensure the foreign exchange registration for the guarantee transaction is completed; failure to register may affect the enforcement of security rights.

Second, in specific industries such as finance, real estate, and mineral resources, when foreign lenders accept relevant assets (eg, financial licenses, real estate rights, mining rights) as security, they must comply with special industry regulatory rules, and some assets may have restrictions on the qualification of entities for mortgage or pledge. Additionally, for guarantees, if the guarantor is a domestic non-financial enterprise, it must comply with China’s provisions on external guarantees, such as not providing external guarantees beyond a certain proportion of its net assets and fulfilling internal decision-making procedures (eg, shareholders’ meeting or board of directors’ resolutions).

Finally, foreign exchange control policies may indirectly impede right enforcement; for example, when foreign exchange remittance is involved after the realisation of security interests, it must meet the foreign exchange authority’s verification requirements for foreign exchange payment, which may increase both the time and compliance costs.

The PRC foreign exchange management system operates under the principle of “risk prevention and targeted liberalisation.” Key regulatory points include the following. For individual foreign exchange management, each person has an annual facilitation quota of USD50,000 for buying or settling foreign exchange, and any excess requires proof of legitimate purposes such as education or medical treatment. Funds are strictly prohibited from being used for overseas property purchases, securities investments, virtual currencies, or NFT transactions, and split transactions are placed on a “watch list” with a three-year restriction on related operations. For corporate capital flows, outbound direct investment (ODI) must be registered with the National Development and Reform Commission and the Ministry of Commerce, and projects exceeding USD5 million require submission of funding sources and risk assessment reports.

Under the PRC General Rules on Loans, the Civil Code and financial regulatory provisions, the borrower must use the loan proceeds in accordance with the purpose agreed in the loan contract and shall not misappropriate them without authorisation. Common restrictions include:

• no use of loans for equity investments (unless explicitly permitted in the contract);
• no illegal refinancing for profit; and
• no use for state-prohibited business activities (eg, illegal financial activities).

If the borrower violates these restrictions, the lender has the right to demand early repayment, charge liquidated damages, and serious violations may affect the borrower’s credit record.

PRC law explicitly recognises the concepts of agency and trust. The “Agency” chapter of the Civil Code stipulates rules on entrusted agency and statutory agency, where civil legal acts performed by an agent within the authorised scope in the principal’s name are binding on the principal. The Trust Law regulates core matters such as trust establishment and the independence of trust property. In practice, common alternative structures to agency or trust include entrustment contracts (focused on affair handling, distinct from the property management nature of trusts) and third-party service agreements (eg, fund supervision agreements), which are often used to simplify procedures or avoid specific trust requirements.

Loan transfer mechanisms in the PRC mainly include assignment of claims and assumption of debts. For assignment of claims:

• the assignor and assignee shall sign a claim assignment agreement; and
• the debtor shall be notified in writing (failure to notify renders it ineffective against the debtor).

Assumption of debts requires the creditor’s consent, otherwise it is invalid. The transfer of associated security interests follows the “accessory follows principal” principle: if the principal claim is assigned, the security interest is transferred together (unless otherwise agreed by the parties). If the security is registered (eg, real estate mortgage, equity pledge), a change of registration must be completed with the original registration authority; failure to register prevents the security interest from being enforced against bona fide third parties.

PRC law does not prohibit debt buyback by the borrower or sponsor, but two core requirements must be met:

• compliance with the terms of the loan/debt securities contract (if the contract explicitly prohibits buyback, it shall not be implemented); and
• no harm to the legitimate rights of creditors or public interests, eg, no evasion of debts through buyback, and no violation of antitrust or financial regulatory provisions (eg, buyback of debt instruments issued by financial institutions must comply with the specific requirements of the PBOC and CBIRC).

In practice, buyback requires necessary internal decision-making procedures (eg, a company’s buyback needs shareholder/board approval).

“Certain Funds” Rules

The China Securities Regulatory Commission (CSRC) requires that, in public acquisitions, the acquirer disclose the legality of fund sources, prove funds are “certainly available” (eg, provide bank credit letters, fund certificates), and prohibit false capital contribution or misappropriation of illegal funds. This provision is standard in public acquisitions and contract-based in private acquisitions. For documentation, long-form documents (with detailed fund terms and security arrangements) are common in public acquisitions; acquisition reports and financial advisor reports must be filed with the CSRC and stock exchanges and made public. Private acquisitions may use short-form documents, which are generally not public. There are no recent major cases; supervision focuses on verifying the transparency of fund sources.       

The following two recent developments have required adjustments to legal documentation.

• The Civil Code unified security rules clarify the validity of floating charge registration and abolish the absolute invalidity of “foreclosure clauses.” As a result, loan/security documents need to add provisions such as “circumstances for determining secured property” and “rectification of foreclosure clauses”.
• Strengthened financial supervision (eg, amendments to Anti-Money Laundering Law, data security compliance) requires that documents include clauses on dynamic verification of fund use, customer identification, and data confidentiality.

Additionally, green finance development has promoted new provisions in loan documents such as “green fund use certification” and “environmental risk disclosure.”

China has usury restriction rules, which are applied differently depending on the scenario.

• Private lending (between non-financial institutions): according to the Judicial Interpretation on Private Lending, the interest rate shall not exceed four times the one-year LPR at the time of contract formation; excess interest is invalid. Deduction of interest in advance from the principal (“head-cutting interest”) is prohibited, and the deducted portion is not counted as principal.
• Financial institution loans: there is no 4x LPR limit, but interest rates must comply with PBOC and CBIRC regulations and must be “reasonable” (prohibiting excessive interest through dominant position). Additionally, lending may not disguise high interest as “service fees” or “handling fees”; any excess portion is not supported.

China has disclosure requirements for specific financial contracts, primarily including the following.

• Listed companies: must disclose major loan and security contracts. “Major” is defined as amount exceeding 10% of the company’s net assets or affecting operations, disclosed via announcements and filings with stock exchanges.
• Financial institutions: must submit data on loan/security contracts to regulators (eg, PBOC, CBIRC) for inclusion in credit reference systems and financial statistics.
• Private lending: there is no mandatory public disclosure, but disclosure is required to co-operate with judicial/regulatory investigations in cases involving illegal fund-raising or false litigation. Additionally, cross-border financial contracts must be filed with foreign exchange authorities (eg, foreign debt contracts).

Withholding tax rules for payments to lenders are as follows.

• Principal: no withholding tax applies to domestic or overseas payments.
• Interest: for payments to overseas lenders, a 10% withholding income tax is generally withheld (preferential rates apply under tax treaties between China and the lender’s country/region, eg, 5% under the China-Hong Kong treaty). No withholding tax applies for domestic lenders (lenders include interest in taxable income to pay corporate income tax).
• Other payments (eg, liquidated damages, penalty interest): if the payments qualify as “income derived from China,” a 10% (or treaty rate) withholding tax is required; otherwise, no tax is required.

Other taxes relevant to lenders include the following.

• Stamp duty: loan contracts are taxed at 0.05% of the loan amount (exempt for loans between financial institutions and micro-small enterprises); security contracts (eg, guarantee contracts) are generally not subject to stamp duty.
• VAT: lenders pay VAT on interest income (6% for general taxpayers, 3% for small-scale taxpayers), plus additional taxes such as urban maintenance and construction tax and education surcharge.
• Property tax: if the secured property is real estate, the mortgagor pays real estate tax and urban land use tax during the mortgage period; the lender has no such obligation. If real estate ownership is transferred (eg, enforcing the mortgage), deed tax is payable (by the buyer).

The tax concerns and mitigation measures for foreign lenders and non-money centre bank lenders are as follows.

• Tax concerns: foreign lenders face withholding tax and VAT (overseas lenders pay 6% VAT on loan services, withheld by domestic borrowers); non-money centre banks may face stricter tax audits on interest income due to lower regulatory ratings.
• Mitigation: use tax treaties to reduce withholding rates (requiring filing as a non-resident taxpayer to enjoy treaty benefits); overseas lenders complete tax registration for legal input VAT deduction; non-money centre banks improve interest income accounting and retain fund use certificates to respond to tax inspections.

Additionally, foreign lenders must complete foreign debt registration to ensure compliant cross-border fund flow.

Common secured assets include:

• real estate (buildings, land use rights);
• movable property (production equipment, vehicles, inventory); and
• rights (equity, intellectual property, accounts receivable, deposit certificates).

Main security forms include:

• mortgage (for real/movable property, requiring a written contract);
• pledge (delivery of movable property for chattel pledge, registration or delivery of right certificates for pledge of rights); and
• lien (statutory security, eg, creditor possesses debtor’s movable property and claim is due).

Formalities and Perfection

A written contract is required for mortgage/pledge, and registration is mandatory for real estate mortgages and equity pledges (with authorities such as real estate registration centres or the State Administration for Industry and Commerce (SAIC)). Without registration, the mortgage/pledge contract is valid, but the mortgage/pledge right is not legally established (or cannot be enforced against third parties).

Timeline

Registration takes three to ten working days. Costs include registration fees (eg, RMB550 per real estate mortgage) and appraisal fees (0.1%-0.5% of asset value if appraisal is needed).

PRC law does not have the “floating charge” concept under common law, but the Civil Code provides a “floating charge on movable property” system: enterprises, individual businesses, and agricultural producers may create a mortgage over their existing and future production equipment, raw materials, semi-finished products, and products. Its core features include:

• before the secured property is determined, the mortgagor may freely dispose of it (eg, sell, lease); and
• the secured property is determined upon default after maturity, the mortgagor’s bankruptcy/dissolution, or the occurrence of agreed mortgage enforcement events.

After determination, the floating charge converts to a fixed mortgage, and the mortgagee may claim priority over the determined property.

PRC law permits downstream (parent for subsidiary), upstream (subsidiary for parent), and cross-stream (sibling companies) guarantees, but with restrictions.

• Upstream and cross-stream guarantees: must comply with the Company Law, ie, the guarantor’s shareholder meeting or board must pass a resolution (the related shareholders recuse themselves from voting), and the guarantee must not harm the guarantor or its minority shareholders.
• Cross-border guarantees: filing or registration with foreign exchange authorities is required (eg, domestic guarantee for overseas loans, overseas guarantee for domestic loans), otherwise cross-border fund payment may be restricted.

To address insufficient credit support, common solutions include:

• adding mortgaged/pledge assets;
• introducing third-party guarantees (eg, professional guarantee companies); and
• raising the guarantor’s registered capital or net asset threshold.

A target company providing guarantees or financial assistance for the acquisition of its own shares must comply with Company Law restrictions.

• A shareholder meeting resolution is mandatory (the board has no decision-making power), requiring approval by more than half of the voting rights of shareholders present (related shareholders need not recuse themselves but must truthfully disclose related-party relationships).
• Protection of the target company: the guarantee must not harm the company, eg, the guarantee amount must not exceed net assets and must not cause insolvency. Without the shareholder meeting resolution, the guarantee or financial assistance may be ruled invalid by the courts.

In practice, acquirers usually stipulate in acquisition agreements that “the target provides guarantees only after completing internal resolutions” to ensure compliance.

Other restrictions, costs, and consent requirements for guarantees/security include the following.

• State-owned enterprise guarantees: major guarantees (eg, amounts exceeding 10% of net assets) require approval of the State-owned Assets Supervision and Administration Commission of the State Council.
• Listed company guarantees: board and shareholder meeting resolutions are required, with timely public disclosure of the announcement.
• Costs: in addition to registration and appraisal fees, legal fees (RMB5,000-50,000 for drafting documents) and insurance premiums (if insuring secured property) may apply.
• Special industries: financial institutions and medical institutions must comply with industry regulations (eg, banks need to meet capital adequacy requirements for guarantees).

Release of Mortgage Guarantees

The extinction of the principal debt, including repayment, set-off, or forgiveness, results in the termination of the mortgage. Additionally, if the mortgaged property is destroyed and there is no substitute, the mortgage right is extinguished.

Release of Pledge Guarantees

For movable property pledges, the pledgee must immediately return the pledged property after the debtor fulfils the obligation. If the pledged property is damaged, the parties may negotiate a discounted value or compensation before releasing the pledge. For rights pledges (such as equity or accounts receivable), the pledgee must cancel the pledge registration in the China Securities Depository or relevant market supervision system once the principal debt is extinguished. If the pledgee delays, the debtor may apply to the court for compulsory enforcement.

Release of Lien Rights

After the debtor repays the debt, the lien holder must return the liened property. The debtor may also provide equivalent security (eg, a deposit) to request an early release of the lien.

Under PRC law, rules for priority of competing security interests are:

• registered security takes priority over unregistered security;
• for all registered securities, priority follows the registration order; and
• for unregistered chattel mortgages, repayment is in proportion to claims (a chattel pledge is effective upon delivery; no pledge right exists if the property is not delivered, so it is not given priority).

Subordination methods include:

• contractual subordination (creditors agree that part of their claims are subordinate to other claims); and
• security subordination (sureties agree their liability is subordinate to other securities).

Priority can be contractually adjusted within a lender group or between two groups, but such arrangements cannot be enforced against bona fide third parties. Upon the borrower’s insolvency, contractual subordination provisions remain valid ‒ subordinate creditors can claim only after senior creditors are repaid. However, if such provisions harm overall insolvency creditors’ interests (eg, disguised asset transfer), the insolvency administrator may ask the court to revoke them.

Major statutory security interests (priming liens) that take priority over lenders’ security interests include:

• insolvency expenses and common benefit debts (eg, insolvency litigation fees, loans for the debtor’s continued operation), which have priority over all security interests;
• employees’ wages, social insurance premiums and compensation, which are prioritised over general security interests in insolvency;
• construction project price priority (contractors are paid first from project proceeds), which takes precedence over registered real estate mortgages; and
• ship/aircraft liens (eg, crew wages, salvage fees), which take priority over ship/aircraft mortgages.

Common methods to structure around priming liens include:

• verify unpaid project prices or labour debts on target assets before lending;
• require contractors to issue written commitments to “waive construction project price priority”;
• for ship/aircraft loans, prioritise targets with no existing liens or cancelled lien records;
• in insolvency, obtain priority by providing common benefit debt financing to indirectly cover risks to the original security interests.

Under PRC law, a secured lender may enforce its collateral in the following circumstances:

• the principal debt is unpaid after maturity (eg, the borrower fails to repay the principal or interest on time);
• agreed acceleration events occur (eg, the borrower transfers assets without permission or initiates bankruptcy/liquidation); and
• the guarantor breaches obligations (eg, the guarantor transfers assets to avoid liability).

Methods, procedures, restrictions and concerns including the following.

• Enforcement methods: judicial enforcement is primary ‒ lenders may sue in court or apply for compulsory execution with a notarised enforcement certificate; courts usually dispose of collateral via judicial auction or sale. Private enforcement (eg, negotiated set-off) is allowed if it is contractually agreed and not harmful to others.
• Procedural requirements: for real estate mortgages, verify the status of the right with the registration authority  and submit the security contract/registration certificate for enforcement. For pledges (eg, equity), cancel the registration first, before enforcement. For guarantees, general guarantees require enforcing the debtor’s assets first, while joint liability guarantees allow direct enforcement against the guarantor.
• Restrictions/concerns: “foreclosure clauses” are prohibited (no automatic transfer of collateral ownership on default); disposal of certain collateral (eg, state-owned assets) needs regulatory approval; enforcement may be suspended in bankruptcy; cross-border security enforcement must comply with foreign exchange rules and rely on judicial assistance.

Choice of Foreign Governing Law

Pursuant to PRC Law on the Application of Law to Foreign-Related Civil Relations and relevant judicial interpretations, parties to a foreign-related contract may agree to choose a foreign law as the governing law, but certain restrictions apply. First, if the contract dispute involves China’s “mandatory provisions” (eg, foreign exchange control, national financial security, foreign investment access), those provisions shall still apply Chinese law, and the foreign law agreement concerning them is invalid. Second, if the chosen foreign law violates China’s public interest, the court will refuse to apply it and instead enforce Chinese law. Additionally, for special contracts like real property rights contracts and Sino-foreign equity joint venture contracts performed in China, Chinese law is mandatorily applicable, and parties cannot choose a foreign governing law.

Submission to a Foreign Court

Chinese courts generally respect parties’ agreements to submit to a foreign court, but statutory conditions must be met. First, the jurisdiction agreement shall be in writing, and the chosen foreign court shall have a “practical connection” with the contract dispute (eg, the parties’ domicile, contract signing/performance place is in that foreign country). Second, if the dispute involves China’s exclusive jurisdiction (eg, real property rights disputes, disputes over Sino-foreign investment enterprise contracts performed in China), the agreement to choose a foreign court is invalid, and Chinese courts shall have exclusive jurisdiction. Finally, even with a valid foreign jurisdiction agreement, if one party sues in a Chinese court and the other party not raise an objection to the jurisdiction but participates in the proceedings, the Chinese court may be deemed to have jurisdiction.

Waiver of Immunity

China adopts the “restrictive immunity principle” for state immunity. If a foreign party (eg, a foreign state, government agency) explicitly waives immunity (including jurisdiction and enforcement immunity) in writing through a contract, and the waiver does not violate PRC law or public interest, Chinese courts usually recognise its validity. However, certain conditions apply:

• first, the waiver must be “clear and specific”; implied acts (eg, only participating in litigation without explicit waiver) do not constitute a valid waiver;
• second, a waiver of jurisdiction immunity does not equal a waiver of enforcement immunity, which requires a separate explicit waiver; and
• third, if involving a foreign state’s core sovereign acts (eg, diplomatic, military acts), its immunity cannot be waived, and the relevant waiver agreement is invalid.

Under PRC law, the enforcement rules for foreign court judgments and arbitral awards differ. For foreign court judgments, pursuant to the Civil Procedure Law and relevant judicial interpretations, their recognition and enforcement in China require compliance with the “principle of reciprocity” (practical reciprocity is needed if no judicial assistance treaty exists between the two countries) and must not violate China’s fundamental legal principles, national sovereignty, security, or public interests. The court only reviews the procedural legality of a judgment (eg, jurisdiction, the parties’ right to appear in court) and does not reconsider the merits of the case. However, the applicant must submit the required documents (such as a certified copy of the judgment and a translation). Once the review is approved, the judgment can be enforced directly without retrial.

For foreign arbitral awards (including international commercial arbitral awards), in accordance with the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and PRC law, as long as the award does not fall within the grounds of refusal of enforcement specified in the New York Convention (eg, invalid arbitration agreement, improper arbitration procedure, exceeding the scope of arbitration), Chinese courts only conduct a procedural review without a retrial of the merits. After the review is approved, enforcement of the judgment can be carried out.

Cross-Border Capital Flow Supervision

Principal, interest and other proceeds recovered by foreign lenders must be settled or remitted through designated foreign exchange banks. Failure to complete foreign debt registration or fund use verification under the Foreign Exchange Administration Regulations may cause remittance delays or restrictions.

Data Compliance Requirements

Under the Data Security Law, if customer information and transaction data related to loans/securities are considered to be “important data”, cross-border transfer requires a security assessment. ¬The unauthorised transfer of data may restrict data use and hinder access to information during enforcement.

Sovereign Immunity and Special Entity Restrictions

If the guarantor is a state-owned enterprise or government-related entity, its core assets for public services may be subject to sovereign immunity or administrative control. Disposal requires additional approval, potentially delaying enforcement.

Automatic Stay and Enforcement Restrictions

Under the Enterprise Bankruptcy Law of the PRC and related judicial interpretations, once a debtor enters bankruptcy proceedings, the court assumes unified management of the debtor’s assets and generally imposes an automatic stay of enforcement against individual creditors. For secured creditors, this means that even if the debtor defaults, they cannot immediately pursue independent recovery through auction or disposition of the collateral. The court may restrict any separate enforcement actions to protect the interests of all creditors and maintain the ongoing operations of the debtor’s business.

Priority Rights of Secured Creditors

Although enforcement may be temporarily restricted during bankruptcy proceedings, the law grants secured creditors priority rights over bankruptcy assets. Specifically, properly registered or perfected mortgages, pledges, receivables pledges, and equity pledges allow secured creditors to recover from the proceeds of the relevant collateral before unsecured creditors. However, the exercise of these priority rights remains subject to supervision by the bankruptcy administrator and the court. Any proceeds exceeding the debt amount are generally required to be returned to the bankruptcy estate and distributed according to the bankruptcy process.

Bankruptcy Expenses and Administrative Claims

The debts that are paid first in a company’s insolvency are bankruptcy expenses and administrative claims. These include the remuneration of the bankruptcy administrator, costs for preservation and disposal of assets, and litigation or arbitration expenses. These claims have the highest priority because they are directly related to the proper conduct of the bankruptcy proceedings.

Employee Wages and Social Security Claims

Next in priority are employee claims, including wages, social insurance contributions, housing provident fund, and other statutorily mandated employee benefits. These claims are specially protected by law to safeguard employees’ basic livelihood and maintain social stability.

Taxes and Government Claims

The third priority is given to taxes and other government claims that are legally payable. This includes national taxes such as value-added tax, corporate income tax, and stamp duties, as well as legally imposed fees or fines payable to local authorities. Claims of the state and local governments take precedence over ordinary civil claims.

Secured Claims

Fourth in priority are secured claims, which are debts backed by specific assets such as mortgages, pledges, equity, or receivables. Secured creditors may recover from the proceeds of the collateral before other creditors, but recovery is limited to the value of the collateral. Any shortfall beyond the collateral’s value is treated as an unsecured claim.

Unsecured Claims

Finally, unsecured claims include ordinary supplier debts, contractual obligations, and other claims not backed by collateral. Unsecured creditors are repaid from the remaining bankruptcy assets according to the order of claim registration or proportionally as determined by the court, and only after higher-priority claims have been satisfied.

In China, bankruptcy liquidation proceedings typically take one to three years, while judicial reorganisation proceedings also generally take one to three years, although complex cases may take longer. Secured creditors usually achieve a relatively high recovery rate, but the amount recovered is limited to the value of the collateral. The recovery rate for unsecured creditors is uncertain and often falls below the value of the company’s assets at the time of bankruptcy filing. Enforcement and recovery for cross-border claims or cases involving complex asset structures are more complicated, requiring careful consideration of procedural delays and potential market discounts.

In China, outside insolvency proceedings, companies can access three types of non-insolvency rescue or reorganisation procedures to improve financial conditions and avoid bankruptcy, all of which are widely used in practice.

• Debt restructuring: companies may negotiate with creditors to adjust debt terms, such as extending repayment periods, reducing interest rates, partially forgiving debts, or converting debt to equity. This is common in agreement-based restructuring involving major creditors like banks and suppliers, with the agreement detailing repayment priority, default liabilities, and dispute resolution methods to ensure legal validity.
• Equity or asset restructuring: companies optimise capital structure by selling non-core assets, introducing strategic investors, increasing registered capital, or transferring equity, following the Company Law and Securities Law. Listed companies must comply with CSRC and stock exchange rules, and some cases combine debt-to-equity conversion for dual adjustment of debt and equity.
• Settlement and mediation: companies can use courts, arbitration institutions, or industry associations as platforms to reach settlement agreements with creditors. Signed agreements have legal effect, and some obtain judicial confirmation to enhance enforceability, particularly in cases involving many creditors and complex debt structures.

If the borrower, security provider, or guarantor becomes insolvent, lenders face multiple risks. For the borrower, insolvency eliminates their ability to repay, leaving lenders unable to fully recover principal and interest. Lenders must participate in bankruptcy proceedings to assert their claims, often ranking below employee claims and tax claims, resulting in a very low recovery rate. When a security provider is insolvent, the secured assets may be included in bankruptcy estate. The lender’s priority rights over these assets may be restricted by bankruptcy procedures or may fail to be fully realised due to asset depreciation or claims from other creditors. A guarantor’s insolvency limits the performance of guarantee obligations; if the guarantor lacks sufficient bankruptcy assets, the lender’s security interest is lost, and they can only participate in distribution as an ordinary creditor, increasing loss risks. Additionally, insolvency of any of the three parties may lead to prolonged legal procedures, extending the lender’s fund recovery cycle and resulting in additional time and cost.

In the PRC, project finance has been an increasingly important method for financing large-scale infrastructure, industrial, and energy projects. This structure typically relies on the project’s anticipated cash flows, with limited recourse to the sponsors’ balance sheets. Over the past decade, the Chinese government’s strong focus on infrastructure development, energy transition, and urbanisation has driven significant growth in project finance activity.

Public-private partnership (PPP) transactions in China operate under a regulatory framework that emphasises standardisation and risk control, with multiple institutional constraints. China lacks a unified PPP law, relying instead on regulations from the Ministry of Finance (MOF) and the National Development and Reform Commission (NDRC). The 2024 Measures for the Administration of Concessionary Operations in Infrastructure and Public Utilities clarify the civil nature of concession agreements, allowing arbitration for commercial disputes, while reserving administrative disputes for judicial review. The revised draft of the Government Procurement Law expands oversight to include “quasi-PPP” models (eg, ABO) to prevent circumvention of procurement procedures.

Under the Law on the Application of Laws to Foreign-Related Civil Relations of the PRC, the parties to a contract may choose a foreign law (such as English law or New York law) as the governing law. However, the following exceptions require the application of PRC law:

• contracts performed within China involving Sino-foreign joint ventures, Sino-foreign co-operative enterprises, or Sino-foreign co-operation agreements for the exploration and development of natural resources; and
• projects in sectors such as infrastructure, energy resources, or matters of public interest, where regulatory authorities may mandate the application of PRC law.

Under the PRC Constitution, the Land Administration Law, the Water Law, and the Mineral Resources Law, foreign entities face multiple restrictions in acquiring real estate and related rights within China. Foreign entities or individuals are prohibited from directly owning land; they may only obtain land use rights for a limited term through transfer or lease, in compliance with the Foreign Investment Law and the Negative List. Water resources are owned by the state, and foreign entities may obtain water use rights or extraction permits only upon approval ‒ ownership of water resources is not permitted. Similarly, underground mineral resources are state-owned, and foreign companies may acquire exploration or mining rights only through co-operation with Chinese partners (such as joint ventures) and with approval from the Ministry of Natural Resources; key mineral resources are prohibited from being developed by wholly foreign-owned enterprises. According to the Special Administrative Measures for Foreign Investment Access (Negative List), foreign investment in sensitive sectors, such as rare earths and energy extraction, is either prohibited or restricted. These restrictions indirectly affect the ownership of relevant assets and the design and enforcement of related security arrangements.

When structuring deals and choosing the legal form of a project company, compliance and risk isolation are priorities ‒ for example, limited liability companies limit shareholder risk, while partnerships follow different tax rules, which must align with the project’s industry (eg, SPVs for infrastructure). Laws governing project companies include company law, tax law, and sector-specific regulations (eg, energy law for energy projects), regulating establishment, operation, and liquidation. Foreign investment restrictions focus on sensitive sectors (defence, critical infrastructure), requiring filing or approval from foreign investment authorities. PBOC regulations mainly cover foreign exchange management, such as complying with foreign exchange settlement rules for project-related foreign currency receipts/payments and reporting cross-border capital flows. Relevant treaties like bilateral investment treaties (BITs) may offer foreign-funded projects with protections such as fair treatment and access to dispute resolution mechanisms, subject to confirmation of their applicability.

Typical financing sources and structures for project financings in China include four categories.

• Bank financing, the core debt source: domestically, policy banks such as the China Development Bank (CDB) and Exim Bank provide long-term preferential loans, while state-owned and joint-stock banks join syndicated loans. Internationally, the Asian Infrastructure Investment Bank (AIIB) and multinational banks offer multi-currency financing, usually secured by project revenues/assets with limited recourse.
• Export Credit Agency (ECA) financing: China Export & Credit Insurance Corporation (Sinosure) provides guarantees, often co-operating with foreign ECAs on mixed loans/insurance to cover political/commercial risks, cutting costs and extending tenors for equipment exports and overseas projects.
• Project bonds: domestic bonds (eg, project revenue bonds, green bonds, infrastructure REITs) attract long-term capital from insurers/social security. International foreign-currency bonds, which require foreign debt registration, are well suited to stable-cash-flow projects.
• Alternative sources: private equity, commodity trader financing, and less common structures, such as streaming/royalty financing (revenue-sharing by output), serving resource-based or high-growth projects.

Carrying out natural resources projects in China requires focus on three core issues.

• Resource ownership and development rights: under the Constitution and Mineral Resources Law, all mineral and water resources are state-owned. Enterprises can only obtain time-limited exploration/mining rights or water extraction permits via bidding/auction, with the scope of development and duration subject to strict regulation.
• Foreign investment restrictions: the Negative List prohibits foreign investment in rare earths and radioactive minerals. Strategic resources, such as  oil and gas, require Sino-foreign joint ventures with Chinese control, and projects may be subject to national security reviews.
• Export and beneficiation: strategic minerals (eg, rare earths, tungsten) require export quotas or licences, and some may be subject to export tariffs. Policies encourage domestic beneficiation to increase resource value and reduce raw ore exports, meaning projects must meet local processing requirements as set out in industrial policies.

In China, projects must fully comply with environmental, health and safety (EHS) and community consultation laws, as overseen by multiple regulatory bodies. In terms of the environment, they adhere to the Environmental Protection Law and Environmental Impact Assessment (EIA) Law by conducting EIAs, implementing the “three simultaneities” system (designing, building and operating environmental facilities alongside the main project), and meeting pollution control requirements for air, water and solid waste. The Ministry of Ecology and Environment and its local branches oversee EIA approvals and pollution discharge. For health and safety, enterprises establish safety management systems and fulfil occupational health obligations under the Work Safety Law and Law on Prevention and Control of Occupational Diseases; the Ministry of Emergency Management supervises work safety, while the National Health Commission leads occupational disease prevention. For community consultation, public opinions are solicited during the EIA process in accordance with the Measures for Public Participation in Environmental Impact Assessment. Land acquisition projects must publicise compensation plans under the Land Administration Law, and major projects are required to carry out social stability risk assessments. The Ministry of Natural Resources manages land procedures, and the NDRC and local governments provide guidance on stability assessments.