The COVID-19 pandemic continues to spread in many places around the globe. This has influenced the economy as well as many other aspects of the world. Accordingly, the number of project finance transactions has dropped in the past one or two years, especially those transactions involving a cross-border element.
Separately, the Civil Code of the People’s Republic of China (for the purpose hereof only, excluding the Hong Kong Special Administrative Region, the Macau Special Administrative Region and Taiwan, the “PRC” or “China”) was passed on 28 May 2020, and came into force on 1 January 2021, upon which date the Property Law, the Contract Law, the Security Law, the Tort Law, the Marriage Law, the Succession Law, the Adoption Law, the General Principles of the Civil Law, as well as the General Rules of the Civil Law, ceased to have effect. It is expected that the application and interpretation of the Civil Code will lead to consequential changes to the documentation of project finance transactions.
The LIBOR transition will also cause changes to the drafting of lending documentation, in particular the rate-switch mechanics and the replacement of screen-rate provisions. The scale of the task facing the financial sector (especially in light of COVID-19-related delays) requires the implementation of the adjustments to systems, infrastructure and documentation required to facilitate transition from LIBOR, as far in advance of the end of 2021 as possible. The People’s Bank of China (as the central bank of the PRC, PBOC) and industry working groups work closely and co-ordinate with relevant authorities in other jurisdictions to ensure an orderly transition process in China.
The project sponsors are almost always the shareholders of the project company. Depending on the industry, the institutions acting as sponsors will be different, ranging from state-owned enterprise to private enterprise, and from domestic corporates to international corporates.
Lenders involved in project finance transactions in China are mainly banks. Previously, foreign banks were quite active in the market, while in recent years Chinese banks have played a more and more important role in project finance transactions, which includes state-owned banks and joint-stock banks. Export credit agencies, such as the China Export & Credit Insurance Corporation (Sinosure), also play a significant role in the market, by providing guarantees and insurances. Sinosure provides insurance support and issues guarantees to counterparties of Chinese export-oriented companies.
Public-private partnership transactions are commonly seen in public service industries, such as energy, transport, environmental protection, agriculture, forestry, technology, government-subsidised housing, healthcare, education and culture, etc.
The legislations applicable to public-private partnership transactions include (but without limitation) the Civil Code, the Budget Law, the Government Procurement Law and the Bidding Law.
There are several main issues that need to be considered when structuring project finance transactions in China.
Firstly, the parties need to consider carefully on what basis the deal should be structured: non-recourse, limited recourse or otherwise. Sponsors normally prefer a non-recourse or limited recourse deal; however, in many project finance transactions the lenders will require a guarantee or other security from the sponsors even though they take security over all the project assets.
Secondly, the capital ratio is regulated and determined based on the nature of the investment project under PRC laws. Generally, the minimum capital ratio is 25% but it varies depending on the nature of the investment project. Project sponsors need to structure their financial model carefully so that the capital ratio requirement does not affect the return on invested capital.
It is expected that the industries/sectors relating to the so-called “New Infrastructure”, such as 5G, Data Centre, AI, Industrial Internet and IoT etc, will be more active in the coming year.
Under PRC laws, the following types of assets are typically available as collateral to lenders:
The forms that security typically takes in the market include guarantee, pledge and mortgage.
Under PRC laws, security created over certain types of assets need to be registered at the relevant asset-based registry for perfection purposes. Set out below are the security perfection requirements for the following types of asset:
A Chinese company can create a floating mortgage over its machinery, equipment, raw materials, semi-manufactured products as well as its finished products, both those currently owned and to be owned in the future. However, under PRC laws, it is not generally possible to create a floating charge over all present and future assets of a company. Separate agreements are required to create a security over each type of asset.
Costs associated with registering collateral security interests in China are minimal, and the borrower usually pays these costs (if any) directly. For example, the registration fee for security over a land-use right and buildings is RMB80 or RMB550 (depending on the types of land-use right and buildings) for each registration, the registration fee for security over receivables is RMB100 per annum for each registration, and no registration fee is payable for security over shares.
To the extent practically possible, it is almost always necessary to identify each item of collateral in the security document individually in order to grant a valid security interest. It is noteworthy that it may not be possible to identify individually each item of collateral for certain types of security, such as a floating mortgage over machinery, equipment, raw materials, and semi-manufactured products, as well as finished products (both currently owned and to be owned in the future). In this case, a general description of the collateral should be sufficient. It is also advisable to consult in advance with the relevant security registry regarding whether the collateral needs to be individually identified for the purpose of security perfection.
Under PRC laws, there are two types of cross-border security that need to be registered with the State Administration of Foreign Exchange of the PRC (SAFE), which are Nei Bao Wai Dai (NBWD) and Wai Bao Nei Dai (WBND). NBWD refers to a financing transaction where both the borrower and the lender(s) are located outside China, while the guarantor/security-provider is located in China, and WBND refers to a financing transaction where both the borrower and the lender(s) are located in China, while the guarantor/security-provider is located outside China. Other types of cross-border security are generally not required to be registered with the SAFE. For example, if foreign lenders lend into China and take security over assets located in China, the security is not required to be registered with the SAFE. In practice, cross-border security registration may need to have been completed prior to the application of security registration with the relevant asset-based registry, so it is advisable to check with the relevant authorities on a case-by-case basis.
Lenders usually conduct due diligence against the collateral over which they will take security. This due diligence normally includes, among others, whether there are other liens or restrictions on the collateral. Generally, liens are recorded with the relevant security registry and therefore are searchable following the prescribed procedures (eg, the authorisation of the collateral owner may be required).
Generally, the parties may choose the form of security release, as there is no restriction in this regard under PRC laws. It should be noted that, if a security release form is required to be submitted to the security registry for the purpose of de-registering the security, it is advisable to confirm with the security registry whether the release form is acceptable.
Under PRC laws, a secured lender can enforce its collateral if the debt secured by that collateral is not paid when due and payable, or if another event of default provided in the finance documents occurs. Generally, there are three methods by which to enforce collateral in China.
Firstly, a secured lender can reach an agreement with the security-provider to receive payment by converting the collateral into value or by obtaining proceeds from the auction or sale of the collateral. When converting the collateral into value or selling off the collateral, the price should be determined by reference to the market price.
Secondly, a secured lender can initiate a lawsuit at the competent PRC court if no agreement could be reached by the parties regarding the collateral enforcement. PRC laws provide a special court procedure to enforce collateral, through which a secured lender can apply directly with the competent PRC court for auction or sale of the collateral. After examination, if there is no substantial dispute between the parties regarding enforcement of the collateral and the conditions to enforce the collateral are satisfied, the PRC court shall rule to auction or sell off the collateral; if a substantial dispute exists between the parties, the PRC court shall rule to reject the application, and the secured lender may initiate an ordinary court procedure.
Thirdly, a secured lender can initiate an ordinary court procedure at the competent PRC court in the event that the PRC court rules to reject the application for a special court procedure. Of course, the secured lender can also directly initiate an ordinary court procedure (without going for a special court procedure first). Once they have obtained a court judgment (or an arbitration award if arbitration is the agreed dispute resolution in the security documents), the secured lender can present it to the court for enforcement.
It is noteworthy that PRC laws also allow the parties to obtain a notarial certificate when signing a security document. In this case, the secured lender can present the notarised security document directly to the competent PRC court for enforcement.
For a foreign-related contract, PRC laws generally allow the parties to choose the governing law (PRC laws or a foreign law) of that contract except where the choice of foreign law violates mandatory PRC legal provisions or any provision of the foreign law violates a public policy of the PRC in the determination of a particular issue, in which case PRC laws would be the applicable laws. Under PRC laws, the following contracts are considered to be foreign-related contracts:
Based on the foregoing, for loan agreements entered into between a Chinese company and foreign lenders, PRC laws generally allow the parties to choose a foreign law (in particular, English law) as the governing law, and PRC courts will give effect to the choice of foreign law. For security documents, however, as a matter of the lex situs doctrine, the security is typically governed by PRC laws, since the security asset is located in China.
Generally, the submission to a foreign jurisdiction should be upheld under PRC laws, provided that it does not contradict the mandatory legal requirements in China, such as the legal requirement regarding exclusive jurisdiction.
Under PRC laws, PRC courts shall, according to the international treaties concluded or acceded to by the PRC or based on the principle of reciprocity, review an application or a pleading for the recognition and enforcement of a judgment rendered by a foreign court. If, upon review, the foreign judgment neither contradicts the fundamental principles of PRC laws nor violates state sovereignty, security and public interest, PRC courts shall rule to recognise and enforce the foreign judgment. China officially signed the Hague Convention on Choice of Court Agreements in September 2017 and, currently, China is still going through the ratification procedure. To date, there is no other international treaty in respect of recognition and enforcement of judgment between the PRC and England/US.
China is a member of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (ie, the New York Arbitration Convention). Therefore, a foreign arbitral award against a Chinese company should be enforceable in China provided that the legal provisions of the Arbitration Law of the PRC are complied with.
Generally, there are no substantive restrictions on a foreign lender’s ability to enforce its rights under a loan or security agreement. However, as the official language in the PRC courts is Chinese, a foreign lender would have to prepare and present a Chinese translation of the documents filed with the PRC courts. Moreover, PRC courts generally require a foreign lender to notarise and legalise its constitutional documents, as well as the power of attorney granted to its legal counsel in a judicial proceeding.
It is worth mentioning the following regulatory requirements when foreign lenders grant loans within the PRC.
Foreign Debt Quota
Pursuant to the regulations of the PBOC, a foreign debt quota is required for a Chinese borrower to take out loans from foreign lenders. The risk-weighted outstanding amount of all foreign loans borrowed by the Chinese borrower shall not exceed its foreign debt quota. The foreign debt quota is calculated as follows:
the borrower’s capital or net assets * the cross-border financing leverage ratio * the macro-prudential regulation parameter.
Depending on the types of borrower, the calculation of foreign debt quota is different; for an enterprise borrower, the quota is calculated based on its net assets and the cross-border financing leverage ratio is 2; for a bank borrower, the quota is calculated based on its Tier 1 capital and the leverage ratio is 0.8; for a non-bank financial institution (eg, insurance companies) the quota is calculated based on its capital and the leverage ratio is 1. Currently, the macro-prudential regulation parameter is 1 for financial institutions and is 1.25 for enterprise borrowers.
NDRC 2044 Filing
For foreign loans with a tenor of not less than one year, the borrower is required to make a filing in advance with the National Development and Reform Commission of the PRC (NDRC). It is noteworthy that the NDRC 2044 filing is required not only where the borrower is a Chinese enterprise; technically, it is also required where the borrower is an offshore subsidiary or an offshore branch controlled by a Chinese enterprise.
Foreign Debt Registration
After the signing of the loan agreement, the borrower is required to register the loan agreement with the SAFE.
It is worth mentioning the following regulatory requirement when granting security or guarantees to foreign lenders: under PRC laws, there are two types of cross-border security that need to be registered with the SAFE, which are NBWD and WBND. NBWD refers to a financing transaction where both the borrower and the lender(s) are located outside of China while the guarantor/security-provider is located in China, and WBND refers to a financing transaction where both the borrower and the lender(s) are located in China while the guarantor/security-provider is located outside China. Other types of cross-border security are generally not required to be registered with the SAFE. For example, if foreign lenders lend within China and take security over assets located in China, the security is not required to be registered with the SAFE.
In addition to the foregoing, security created over certain types of assets located in the PRC need to be registered at the relevant asset-based registry for perfection purposes. See 2.1 Assets Available as Collateral to Lenders for details.
According to the Foreign Investment Law of the PRC, which was promulgated on 15 March 2019 and came into force on 1 January 2020, China applies the National Treatment Principle plus a negative list to foreign investment. That means that foreign investors and Chinese investors are generally treated equally, provided that (i) a foreign investor does not invest in an industry or sector which is prohibited by the foreign investment negative list, and (ii) a foreign investor satisfies certain conditions when investing in an industry or sector which is restricted by the foreign investment negative list.
In addition, China is a member of the World Trade Organization. China has entered into more than 130 bilateral investment treaties and more than 100 double-tax treaties with other countries.
Generally, there are no restrictions on payments abroad or repatriation of capital by foreign investors. A foreign investor may, according to PRC laws, freely remit into or out of China its capital contributions, profits, capital gains, proceeds from disposition of assets, and proceeds from liquidation, whether in RMB or in a foreign currency.
Typically, a project company will maintain its RMB account(s) and/or foreign currency account(s) onshore with Chinese banks. In several circumstances (such as for the purpose of collecting offshore revenue proceeds, or making payment of expenditures outside of China, etc), PRC laws allow a project company to maintain offshore foreign currency accounts, provided that the project company applies for and obtains an approval from the SAFE in advance.
It is worth mentioning the following registration/filing requirements that are applicable to financing agreements.
NDRC 2044 Filing
For foreign loans with a tenor of not less than one year, the borrower is required to make a filing in advance with the NDRC. It is noteworthy that the NDRC 2044 filing is required not only where the borrower is a Chinese enterprise; technically, it is also required where the borrower is an offshore subsidiary or an offshore branch controlled by a Chinese enterprise.
Foreign Debt Registration
After signing the loan agreement, the borrower is required to register the loan agreement with the SAFE.
Cross-border Security Registration
Under PRC laws, there are two types of cross-border security that need to be registered with the SAFE, which are NBWD and WBND. NBWD refers to a financing transaction where both the borrower and the lender(s) are located outside China while the guarantor/security-provider is located in China, and WBND refers to a financing transaction where both the borrower and the lender(s) are located in China, while the guarantor/security-provider is located outside China. Other types of cross-border security are generally not required to be registered with the SAFE. For example, if foreign lenders lend in China and take security over assets located in China, the security is not required to be registered with the SAFE.
In addition, security created over certain types of assets located in the PRC need to be registered in the relevant asset-based registry for perfection purposes. See 2.1 Assets Available as Collateral to Lenders for details.
In China, land and natural resources are generally owned by the state. Individuals or enterprises can be granted with the usufruct in order to use or operate such assets, a licence or a certificate (such as a land-use certificate) will be required in this respect. However, foreign entities are restricted from holding the usufruct of land or natural resources directly. As required by the principle of commercial presence, foreign entities need to establish a foreign investment enterprise in China in order to undertake relevant business or operate such assets.
The security agent concept is generally recognised in the PRC and a security agent can hold security, enforce the syndicate’s rights under the loan documents and apply any enforcement proceeds in accordance with the instructions of the lenders in the syndicate.
Where security interests compete with each other, priority will be determined based on the time when the security interest is perfected. The security interest that is perfected earlier will have priority over that which is perfected later.
Where a sponsor injects equity by way of subordinated debt, the project finance lenders usually procure a subordination undertaking from that sponsor. This kind of contractual subordination provision should generally be upheld by the PRC court, even in the case of the insolvency of the borrower, provided that the contractual subordination provisions do not violate the rules governing the priority of competing security interests under PRC laws.
PRC laws do not generally require a project company to be organised under the laws of China. However, in practice, the competent governmental authority usually requires that the project company be a company incorporated under the laws of China.
As a matter of fact, it is extremely rare that a project company is a foreign company incorporated outside of China, and the typical legal form of a project company is a limited liability company.
The Enterprise Bankruptcy Law of the PRC provides for three types of insolvency proceedings, which are reorganisation, conciliation and bankruptcy liquidation. An insolvency proceeding is commenced by filing an application with the competent PRC court.
A debtor can file an application for reorganisation, conciliation or bankruptcy liquidation with the competent PRC court if the debtor is insolvent (a debtor will be considered insolvent if it is unable to pay off its due debt and/or its assets are not sufficient to pay off all its debts). A creditor can also apply for the reorganisation or bankruptcy liquidation of a debtor with the competent PRC court if the debtor is unable to pay off its due debt. If the court accepts the application, it shall appoint an administrator. Once appointed, the administrator will take over all the debtor’s assets, as well as the management of the debtor. The administrator shall report to the court and be supervised by the creditors’ meeting and by the creditors’ committee.
During the reorganisation proceedings, the debtor or the administrator shall prepare and submit a draft reorganisation plan to the court and the creditors' meeting within six months (unless otherwise extended) after the court accept the reorganisation application. The creditors will discuss the draft reorganisation plan in the creditors’ meeting, and will be divided into groups based on the categories of debts for voting on the draft reorganisation plan. If all groups of creditors pass the draft reorganisation plan, it will be submitted to the court for approval. The reorganisation proceedings shall be terminated upon approval of the reorganisation plan by the court. If the reorganisation plan is not passed by the creditors’ meeting or in other circumstances prescribed by the Enterprise Bankruptcy Law, the court will terminate the reorganisation proceedings and declare the bankruptcy of the debtor.
A debtor can apply for conciliation with the court directly, it can also apply for conciliation after the court accepts a bankruptcy application made by a creditor, but before the declaration of bankruptcy of the debtor. In applying for conciliation, the debtor shall submit a draft conciliation agreement. The creditors’ meeting will discuss and vote on the draft conciliation agreement. If it is passed by the creditors’ meeting, the court shall rule to acknowledge the draft conciliation agreement and terminate the conciliation proceedings. If the draft conciliation agreement is not passed by the creditors’ meeting or in other circumstances prescribed by the Enterprise Bankruptcy Law, the court will terminate the conciliation proceedings and declare the bankruptcy of the debtor.
Once the court declares the bankruptcy of the debtor, it shall notify the debtor, the administrator and the creditors, and make a public announcement. The administrator shall prepare a conversion plan and a distribution plan for the bankruptcy estate, and submit that plan to the creditors’ meeting for discussion. Once the plan has been passed by the creditors’ meeting and approved by the court, the administrator shall be responsible for selling off the bankruptcy estate (usually through auction) and carrying out the distribution plan. Following the final distribution of the bankruptcy estate, the administrator will submit to the court a distribution report, based on which the court will decide whether to conclude the bankruptcy proceedings.
As a matter of principle, upon the debtor’s insolvency a secured lender shall still enjoy priority over the security assets and can enforce the security in accordance with the provisions of PRC laws.
The Enterprise Bankruptcy Law of the PRC provides that, after the court accepts the insolvency application, the preservation measures concerning the debtor’s property shall be released and the execution procedures shall be suspended. Similarly to unsecured creditors, a secured lender shall file its claim (specifying the claim amount as well as whether the claim is secured) with the administrator and participate in the insolvency proceedings. In particular, during the reorganisation proceedings a secured lender shall suspend the enforcement of security. However, if there is a possibility that the collateral may be damaged or the collateral value may decrease dramatically so that it will prejudice the rights of the secured lender, the lender may apply with the court for resumption of the enforcement of security.
In the case of bankruptcy liquidation proceedings, while secured creditors may recover their outstanding loans from the enforcement proceeds of the collaterals, secured creditors may also recover their outstanding loans from the debtor’s general assets to the extent that those secured creditors cannot fully recover their loans from the enforcement proceeds of the collaterals. Subject to the credits mandatorily preferred by PRC laws (such as wages, social insurance premiums and taxes, etc), proceeds from disposition of the debtor’s general assets are distributed to creditors on a pro rata basis.
In the case of a reorganisation proceeding, all the creditors, including secured creditors, will recover their outstanding loans in accordance with the approved reorganisation plan.
Lenders should be aware of the following risks associated with a borrower, security-provider or guarantor becoming insolvent (this is not an exhaustive list).
Firstly, PRC laws provide that after the court accepts the insolvency application, the preservation measures concerning the debtor’s property shall be released and the execution procedures shall be suspended. Similarly to unsecured creditors, a secured lender shall file its claim (specifying the claim amount as well as whether the claim is secured) with the administrator and participate in the insolvency proceedings. In particular, during the reorganisation proceedings a secured lender shall suspend the enforcement of security. However, if there is a possibility that the collateral may be damaged or the collateral value may decrease dramatically so that it will prejudice the rights of the secured lender, the lender may apply with the court for resumption of the enforcement of security.
Secondly, the following transactions are voidable upon insolvency:
Thirdly, mutual debts can be set off in insolvency proceedings, but with limitations. The debts to be set off must arise before the court accepts the bankruptcy application. If the creditor knows that the debtor is insolvent when it acquires the debt to be set off, set off is not permitted, because this will procure for the creditor an advantage to the prejudice of the debtor’s assets. In addition, a debt of unpaid capital contributions to the debtor is generally not permitted to be set off.
There are no entities that are excluded from bankruptcy proceedings in China.
Insurance can be provided only by licensed Chinese insurance companies, which are heavily regulated.
Insurance policies over project assets should be payable to foreign creditors, provided that the creditor in question is named as a beneficiary under the relevant insurance policies.
Domestic lenders must pay enterprise income tax (EIT) in respect of interest originating both within and outside China.
PRC EIT will also arise in respect of interest payable to foreign lenders if (i) the foreign lender has no establishment in China but receives payment of interest sourced from China, or (ii) the foreign lender has an establishment in China and receives payment of interest sourced from China, but the payment of interest is not actually connected with that establishment. The aforementioned EIT payable by foreign lenders shall be subject to withholding at source. The payer (eg, the borrower) will be the withholding agent, and the EIT will be withheld from the interest amount paid to the foreign lenders.
China has signed double taxation treaties with many countries. Tax relief and exemption may be available from the payment of interest according to provisions of the double-taxation treaty between China and the country of the foreign lender.
There is no specific tax provision under PRC laws regarding the proceeds of enforcing security or claiming under a guarantee. However, it is generally believed that similar tax treatment should apply to the extent the proceeds of enforcing security or claiming under a guarantee (or part of them) constitute payment of interest.
It is noteworthy that other taxes (eg, value-added tax) may also be applicable. Domestic lenders shall pay value-added tax in respect of payment of interest. For foreign lenders receiving payment of interest from China but having no establishment in China, value-added tax will be deducted by the payer (eg, the borrower) from the payment.
As a result of the market-oriented interest-rate reform, currently there are no usury laws or regulations generally limiting the amount of interest charged by lenders.
It is noteworthy that, according to the Supreme People’s Court’s latest judicial interpretation, the interest rate for private lending shall not exceed four times the Loan Prime Rate (which is the benchmark rate published on a monthly basis by the National Interbank Funding Centre authorised by the PBOC) for a one-year loan when the loan agreement is concluded. Generally, private lending refers to lending transactions between natural persons, companies or other organisations, but excludes loans provided by regulated financial institutions (such as by a bank). The Supreme People’s Court’s latest judicial interpretation clearly provides that it shall not apply to loans provided by regulated financial institutions. However, in practice, the PRC courts may apply the above interest rate limit to loans provided by other lenders (including by foreign lenders).
For a foreign-related contract, PRC laws generally allow the parties to choose the governing law (PRC laws or a foreign law) of that contract except where the choice of foreign law violates mandatory PRC legal provisions or any provision of the foreign law violates a public policy of the PRC in the determination of a particular issue, in which case PRC laws would be the applicable laws. Under PRC laws, the following contracts are considered to be a foreign-related contract:
Based on the foregoing, if all parties to a project agreement are Chinese companies and no other foreign factors are involved, the project agreement shall be governed by PRC laws. However, if one of the parties to a project agreement is a foreign company, then, in most cases, that project agreement could be governed by a foreign law, provided that this does not violate the mandatory provisions under PRC laws.
For loan agreements entered into between a Chinese company and foreign lenders, PRC laws generally allow the parties to choose a foreign law (in particular, English law) as the governing law, and PRC courts will give effect to the choice of foreign law.
For security documents, however, as a matter of the lex situs doctrine, the security is typically governed by PRC laws, since the security asset is located in China.
As previously mentioned, as a matter of the lex situs doctrine, a security document is typically governed by PRC, laws since the security asset is located in China.
Infrastructure and fixed-asset investments have been a vital force to drive the Chinese economy during the past several decades. The impact of COVID-19 on the global economy is material, but the year of 2020 still saw a 2.9% growth rate in terms of fixed-asset investments in China. Interestingly, classic non-recourse or limited-recourse project finance models were not widely accepted by Chinese banks, notwithstanding the huge amount of financing raised for projects every year in China.
Chinese banks have traditionally placed more weight on the credit strength of the borrower (as the primary source of repayment) and the guarantor (a role normally taken by the parent company of the borrower, as the secondary source of repayment), supported by collaterals, among which the land-use right and buildings thereon are the most important in terms of credit assessment. Looking purely at the cash-flow to be generated by the project and the project assets to discharge the debts, even supported by a limited scope of guarantee provided by the sponsor during the construction stage, most Chinese banks still feel unease. As a result, the trend of project finance in China over the past few years has been a gradual acceptance of project financing rationale and techniques, accompanied by their application in selected sectors.
One key area of application is the public-private partnership (PPP) model. The PPP is the main trend in the project finance market in China. Based on the data disclosed by the National Development and Reform Commission of the PRC (NDRC), up to 20 September 2021, there are 7,734 PPP projects in place, with a total investment amount of RMB10.87 trillion, as approved by or filed with the NDRC, with the top six sectors listed as urban infrastructures, agriculture, forestry and water conservancy, social utilities, transportation, and environmental protections.
During the past several years, the policy trend was to control and clean up unwarranted PPP projects with the aim of controlling the government-implicit debt risk. A major tool was to make the PPP rules more transparent and the PPP documentation more standardised. As a result, with the increasingly standard degree of PPP projects’ rules and documentation, sponsors and project companies have focused more on project quality and project management. This also helps expand the base of participants in this market. For example, Chinese social security funds, insurance funds and other public funds, which have been allowed by the regulators to access the PPP market, have been seen to play an increasingly notable role in providing long-term funding to PPP projects in exchange for stable, predictable cash-flow in the long run. The financing takes the forms of debt, equity investment, and other ways. Compared to traditional bank loans, using more sophisticated and complex financial and legal instruments to finance large-scale PPP projects (especially those that are infrastructure-based) will become more popular in the near future.
The following are a few eye-catching project finance deals in the PPP sector completed during recent years:
In the past two or three years, the rise of green finance as a key part of the project finance market in China has been witnessed. China has an initiative for carbon dioxide emissions to reach a peak before 2030 and to achieve carbon neutrality by 2060. With this initiative, the Chinese regulatory authorities have formed the five pillars of green finance.
In general, the PRC’s green projects credit is showing the characteristics of "large scale, excellent structure and high quality". The balance of green loans has ranked first in the world for many years, and the balance of the clean energy industry at the end of 2020 exceeded RMB3 trillion for the first time, which has exceeded the total amount of loans in the three main energy-intensive fields of steel, coal, and non-ferrous metals in the same period. The green loan NPL ratio was 1.6 percentage points lower than the banking industry's NPL ratio and remained below 0.5% for three consecutive quarters.
The Chinese central bank, the People's Bank of China (PBOC) performs green credit-performance evaluations on banks on a quarterly basis, and the evaluation results are used in the central bank’s internal rating. From 1 July 2021, the PBOC has applied the "Green Financial Performance Evaluation Programme for Banking Depository Financial Institutions" to evaluate financial institutions’ green loans, green bonds and other businesses comprehensively and to expand the use of the relevant standards. For example, when creating monetary policy support tools in the future, green financial performance evaluation results can be used as one benchmark.
For green financing projects, future developments in the following regards have been observed.
Chinese banks have also been issuing green bonds to finance green projects.
In 2015, the PBOC issued an announcement to clarify the definition standards and issuance process of green financial bonds, as well as the "Green Bond Support Project Directory", which was widely applauded by international organisations.
China’s green-bond issuers now include various banking institutions and other entities, and a diversified socially responsible investment group with environmental, social, and governance (ESG) concepts has been formed. Green-bond products have covered multiple varieties such as financial bonds, debt financing instruments, enterprise bonds, and corporate bonds.
Overall, China's green bonds have achieved remarkable results. First, the issuance scale is relatively large. As of the end of 2020, the cumulative issuance of green bonds was about RMB1.2 trillion, second only to the United States and second in the world. The second factor is the long tenor of green bonds issued in the Chinese market. About 90% of the tenor of green bonds in China is over three years. The third is the significant effect of supporting environmental improvement. According to preliminary estimates, the projects funded by green bonds can save about 50 million tons of standard coal each year, equivalent to reducing carbon dioxide emissions by more than 100 million tons.
Green Financing Projects under the “Belt and Road Initiative”
Chinese financial institutions and investors are key to the financing and investment activities under the “Belt and Road Initiative” (BRI). The BRI countries have witnessed a rapid development of green financing projects, not only participated in by Chinese banks and investors but also attracting international and local participants to join the initiative.
Chinese financial institutions have strengthened their support for green projects in the BRI countries through diversified channels such as loans, equity, and debt, including wind power, photovoltaic, solar power and other projects. They also work together with international development agencies to launch some green project co-operation programmes under the BRI.
For example, in 2019, the Industrial and Commercial Bank of China took the lead in the European Bank for Reconstruction and Development and other members of the BRI inter-bank normalisation co-operation mechanism, and jointly released the BRI Green Finance Index to help various investors quantitatively analyse the investment in this area. Green investment opportunities and environmental challenges have led to the flow of funds to the green field, too.
Furthermore, China has carried out the “Belt and Road” green-finance capacity-building through multiple channels to enhance the capacity of countries along the route to develop green finance. For example, the “China-IMF Capacity Building Centre”, jointly established by the PBOC and the International Monetary Fund (IMF), has provided relevant training for many countries along the route. The PBOC and the European Bank for Reconstruction and Development signed a memorandum of understanding in 2019 to strengthen capacity-building.
In short, the BRI green financing project represents a new trend of Chinese financial institutions and investors to access the project finance market, not only in China but also across the BRI countries. They are now playing a role beyond that of a funding partner, by sharing the experience, know-how and expertise gained from the financing of projects in China with the pool of global participants and aiming to build a better world to benefit the BRI countries and peoples.