China’s law on borrowing funds from abroad

CHINA

Circular for Strengthening the Control of Borrowing International Commercial Loans

(Promulgated by the State Council on January 12, 1989)

SUBJECT: FINANCE & BANKING

ISSUING-DEPT: STATE COUNCIL OF CHINA

ISSUE-DATE: 01/12/1989

IMPLEMENT-DATE: 01/12/1989

TEXT:

This Circular is formulated to strengthening the control of borrowing international commercial loans according to the requirements of the Central Government to regulate the economic environment, rectify the economic order and deepen the reform.

1. Strictly control the scale of borrowing funds from abroad. All regions and departments must strictly follow the State’s plan for using foreign investment. No departments and units are entitled to borrow international commercial loans in any form from abroad or borrow funds from China’s institutions and banks outside the territory if the project is not included in this plan and approved by the People’s Bank of China. Without the approval by the State Administration of Foreign Exchange Control, no borrowed funds are allowed to deposit outside the territory. If a loan agreement is signed without authorization, the agreement shall be of no effect, and the State Administration of Foreign Exchange Control shall not register the external debts, neither shall the bank open the foreign exchange account for it and let the capital and interest of the borrowed funds be remitted abroad.

2. Control the remaining sum of borrowing short-term international commercial loans. It is not allowed to exceed the ratified remaining sum without the approval by the State. The exceeding part must be adjusted into the ratified limits within half a year after the issuance of this Circular. Otherwise, the local administration of foreign exchange control shall force it to repay the loans by means of reducing the sum from the corresponding retained foreign exchanges or borrowing the sum from the quota of the long and mid-term international commercial loans. Short-term external loans shall be used only for the turnover of working capital, not for fixed asset investment of projects.

3. The issuance of bonds abroad must be conducted under the State’s plan of using foreign investment and undertaken by the financial institutions approved by the People’s Bank of China to issue the bonds. The institutions issuing bonds must strictly follow the “Regulations for the Control of the Issuance of Bonds Outside the Territory by the Chinese Institutions” promulgated by the People’s Bank of China for approval before the issuance of bonds. The issuance of bonds by the governmental departments on the international market are subject to the approval by the State Council. No negotiations shall be held without approval. The People’s Bank of China shall coordinate for the domestic bond-issuance institutions to enter the international market and investigate carefully the bond-issuance conditions abroad.

4. Tighten the control of foreign exchange guarantees. Foreign exchange guarantees are not only guarantees of external reputation, but also undertake the responsibility of the reimbursement of the debts and must strictly follow the “Provisional Regulations for the Control of Providing Foreign Exchange Guarantees by the Chinese Institutions” promulgated by the People’s Bank of China. External guarantee provided by the enterprise must be supported by sufficient self-owned foreign exchange, and the total guaranteed amount must not exceed its self-owned foreign exchange funds. The aggregated sum of the total foreign exchange guarantees provided by non-banking financial institutions and the total external debts shall not at maximum exceed the limits stipulated by the People’s Bank. Domestic institutions must not provide foreign exchange guarantees for the institutions outside the territory without the approval by the State Administration of Foreign Exchange Control. Governmental departments and institutions must not provide foreign exchange guarantees abroad.

5. Strictly examine the project loans. While borrowing long or mid-term international commercial loan for a project, the debtor, before borrowing the funds, must make a careful feasibility study on the reimbursement ability and economic benefits of the project, make sure the responsibility of reimbursement and be strictly evaluated by the financial institutions. Projects which are not yet approved by the State’s planning departments or still subject to the availability of corresponding inputs of RMB, energy supply and transportation facilities shall not use international commercial loans. Construction projects which are not included in the State’s plan shall not use international commercial loans either. The funds borrowed from abroad by domestic institutions shall not, generally speaking, be used as foreign exchange mortgage for RMB loans, nor shall they enter the transaction market of foreign exchange. It is subject to the examination and approval by the State Administration of Foreign Exchange Control if there is a special need.

6. Tighten the control of the entities for borrowing external debts. Except for the entities already designated by the State, namely, Bank of China, Bank of Communications, China International Trust and Investment Company, China Investment Bank, Guangdong International Trust and Investment Company, Fujian Investment and Enterprise Company, Hainan International Trust and Investment Company, Shanghai Investment and Trust Company, Tianjin International Trust and Investment Company, and Dalian International Trust and Investment Company, no additional entities will be approved for borrowing external debts from now on. Other regions, departments and units shall apply to the People’s Bank of China for international commercial loans on the case-by-case or exclusive basis. The People’s Bank of China shall seriously check and rectify the existing entities for borrowing external debts. All entities borrowing foreign funds and units approved by the People’s Bank of China to borrow international commercial loans must follow the relevant rules and regulations to go through the procedures of borrowing foreign funds.

7. Further improve the external debts registration, the statistical and monitoring system. No matter the funds are raised directly from abroad or transferred domestically, they shall all be included in the State’s statistical and monitoring system of external debts and have them properly registered so as to ensure the macro monitor and control of scale and structure of external debts by the State. The State Administration of Foreign Exchange Control must work out as soon as possible the measures for registration, statistics and monitoring of the transfer of loans. For those who do not go through the formalities of registration or delay doing so, penalties must be imposed strictly according to the relevant rules and regulations.

8. Reasonably arrange the structure of external debts. The State Administration of Foreign Exchange Control and other departments must make timely studies on the different currencies, interest rates, periods of reimbursement, borrowing forms, countries and markets of the loans, and make proposals to the State Council. The People’s Bank of China must work out as soon as possible “Regulations for the Control of International Commercial Loans” and strengthen the examination, approval and control.

9. People’s governments at all levels and the competent departments must strictly follow all the provisions stipulated in this Circular, conscientiously include the control of their external debts into their agendas, try their best to raise the return rate of the borrowed funds and make sure to repay the debts on schedule so as to maintain the reputation of our country. The administrations of foreign exchange control at all levels must strengthen their supervision, examination and direction of borrowing funds from abroad and make timely reports. For those who violate the State’s rules and regulations on the control of external debts, the State Council shall authorize the State Administration of Foreign Exchange Control to deal with it sternly, and investigate and affix the responsibility of the persons and leaders concerned.

This Circular shall not apply to the enterprises with foreign investment.

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