New Development on m88 casino review Exchange Control: Circular No.19 Clarifies and Simplifies m88 casino review Debt Registration

To deepen the reform of m88 casino review exchange administration, the State Administration of m88 casino review Exchange (“SAFE”) released the Circular on Issuing the Measures for Administration of m88 casino review Debt Registration (Hui Fa [2013] No.19, “Circular No.19”) on April 28, 2013. Circular 19 substantially improved the current m88 casino review debt registration regime by simplifying and clarifying the m88 casino review debt registration procedures. Along with Circular No.19 coming into effect on May 13, 2013, eight previous administrative regulations and rules in connection with the m88 casino review debt administration, including the Circular on Issues Concerning Improvement of m88 casino review Debt Administration (Hui Fa [2005] No.74), have lost their effects.

Circular No.19 is distinct from the current administration rules of m88 casino review debt registration with the following notable highlights:

1.Upgrading m88 casino review debt administration

Circular No.19 applies different m88 casino review debt registration requirements to three different types of debtors within the PRC, namely the finance authority, the domestic banks and other domestic debtors. Where a debtor is a finance authority, it shall report to the local m88 casino review exchange administration the preceding month’s information on contract signing, withdrawal, repayment and account changes in relation to the m88 casino review debts and the related currency conversion between m88 casino review exchange and Renminbi (RMB) within the first 10 working days of each month. Where a debtor is a domestic bank, the debtor shall report the information of m88 casino review debts through the relevant online administrative system run by SAFE for each of the debts. Where a debtor is an entity other than the foregoing two types of debtors, the debtor shall register or file each of the debts to the local m88 casino review exchange administration within the designated time limit.

Furthermore, Circular No.19 explicitly provides that the following three types of enterprises with m88 casino review investment shall for the purpose of m88 casino review debt administration be treated in the same way as Chinese domestic enterprises¹: (a) domestic enterprises in which the m88 casino review capital contribution is less than 25%; (b) m88 casino review-invested enterprises (“FIEs”) with the total investment equal to the registered capital; and (c) FIEs with m88 casino review capital contribution not less than 25% while the total investment amount not being specified. The m88 casino review debt of FIEs below will be administered by reference to the rules applicable to Chinese domestic enterprises (i.e., quota control by NDRC and SAFE): (i) FIEs in which m88 casino review capital contribution is reduced to below 25% due to capital increase (of Chinese investors), equity transfer or restructuring, or (ii) FIEs with their enterprise classification changed, making it impossible to calculate the difference between the total investment and the registered capital. With respect to such FIEs, the m88 casino review debts that have been remitted to the related FIE’s account before the occurrence of the above transactions or changes could still be converted into RMB and repaid in accordance with the operational guidance set forth in the related Appendix attached to Circular No.19. Nevertheless, such FIEs are not allowed to withdraw any new m88 casino review debt after the related transactions or changes occur.

Circular No. 19 emphasizes that, unless otherwise provided under laws, the trading credits (such as m88 casino review customer advances and payables to m88 casino review sellers of goods or services), and payables to m88 casino review entities arising from the trading of financial assets (other than m88 casino review debts) including the ancillary interests and fees, shall not be deemed as m88 casino review debts in terms of the m88 casino review debt quantity control. In such cases m88 casino review debt registration is not required, and the domestic entities shall pay relevant considerations and costs to m88 casino review entities in accordance with the m88 casino review exchange regulations applicable to the underlying transactions.

2.Clarifying the use of m88 casino review debts

Pursuant to Circular No.19, m88 casino review debts could be used for trading of goods and services within the borrower’s business scope, and for financial asset transactions as prescribed by laws. With respect to the use on transactions of financial assets, the following requirements and restrictions are worth of noting:

(1)Repayment of existing debts with new borrowing is allowed, but the new m88 casino review debts cannot be converted into RMB. The new debts raised by an FIE for the similar m88 casino review debt restructuring will not deplete its m88 casino review debt quota defined by the difference between total investment and registered capital, as long as the principal balance of such FIE’s m88 casino review debts does not increase and the new borrowings will not be converted into RMB;

(2)m88 casino review debts could be used for equity investment by, for example, setting up new enterprises or acquiring equity or shares in any Chinese or m88 casino review enterprises, provided that for such purposes (a) only transfer with original currency of m88 casino review debts is permitted, i.e., no conversion of m88 casino review currencies into RMB is allowed, and (b) the borrowers should have the approved business scope to do equity investment;

(3)No m88 casino review debts could be used for providing loans, except for the loan extension by m88 casino review-invested leasing companies or m88 casino review-invested small loan companies;

(4)No m88 casino review debt could be used for providing mortgage or pledge, except for that made by guarantee companies,;

(5)No fund raised by m88 casino review debts could be used for securities investment; and

(6)Where the funds in a m88 casino review debt account need to be saved as fixed-term deposits, the debtor can carry out the relevant procedures with the same bank in the jurisdiction of the same branch of SAFE, as long as there is no conversion or transfer of funds.

As far as item (2) above is concerned, we understand, based on the restrictions on fund transfer and business scope, that the provision should only apply to FIEs having the business scope to do investment activities, such as m88 casino review-funded investment companies, m88 casino review-invested venture capital companies, and m88 casino review-invested partnership enterprises which engage in private equity investment. Ordinary FIEs cannot use m88 casino review debt for reinvestment in China.

As for the period for use of m88 casino review debts, Circular No.19 requires that the use period shall match the repayment period of m88 casino review debts. Except for a bridge loan, as a principle, short-term m88 casino review debts may only be used as working capital, and may not be used in medium-term or long-term usages such as investment in fixed assets. Unless the approval authority or the creditor specifies the use method, medium-term or long-term m88 casino review debts could be used for short-term purposes.

Regarding m88 casino review exchange settlement, Circular No. 19 provides that in principle m88 casino review debt borrowed by a domestic financial institution or a domestic enterprise may not be converted into RMB, unless otherwise approved by SAFE as an exceptional case. m88 casino review debts borrowed by an FIE may be converted into RMB based on the actual needs of such FIE. In this connection, Circular No.19 continues the administrative mode set up by Circular No.142 of SAFE issued in 2008, which requires the bank to examine the documents related to the use of RMB converted from m88 casino review debts, including the related contracts, agreements, invoices, payment orders (from the payee), payment instructions (form the payer), checklists or certificates, etc. Banks are also required to carry out due diligence investigations on the use of m88 casino review debts declared by a debtor (other than any bank) with regard to the m88 casino review exchange settlement, and to provide necessary reminders to debtors regarding legal compliance issues. In addition, Circular No.19 requires the enterprise applicants to provide the following written statement: “the company undertakes that the use of the RMB funds converted from the m88 casino review debts complies with the declared using methods; if the actual usage does not comply with the declared using methods, the company will take the corresponding legal liabilities.”

3.Specifying procedures m88 casino review approval principles for onshore loans guaranteed by offshore entities

Circular No.19 provides that when an FIE borrows onshore loans with guarantees provided by an offshore entity, the FIE can directly enter into the guarantee agreement with the m88 casino review guarantor and the creditor. Where the debtor defaults and the m88 casino review guarantor repays the debts, the m88 casino review debt arising from the performance of guarantee should be deemed as short-term m88 casino review debt (calculated based on the balance of principal owed by the onshore debtor to the offshore guarantor). Such m88 casino review debts shall be subject to SAFE’s quantity control according to the difference between the FIE’s total investment and registered capital.

As to Chinese domestic enterprises, Circular No. 19 provides that any Chinese domestic enterprise which intends to receive m88 casino review guarantees for onshore debts should apply to the local branch of SAFE for a quota. After the quota is granted by SAFE, the Chinese domestic enterprise may enter into the guarantee agreement to the extent of the approved quota. SAFE will review the applications by considering the following principles:

(1)Whem88 casino reviewr m88 casino review enterprise’s business falls into an encouraged industry according to m88 casino review State’s policy;

(2)Whem88 casino reviewr m88 casino review enterprise gained profits during m88 casino review past three years consecutively, or has a positive outlook of business operation;

(3)Whem88 casino reviewr m88 casino review enterprise has m88 casino review sound financial management system and internal control system;

(4)m88 casino review ratio of net assets against total assets of m88 casino review enterprise shall not be less than 15%; and

(5)the total balance of the m88 casino review debts and the offshore guarantees shall not exceed 50% of the enterprise’s net assets.

Where the offshore guarantor repaid the debts, the Chinese domestic debtor shall carry out short-term m88 casino review debt registration for such payables and file the required information with the local branch of SAFE.

4.Brief Comments

Circular No.19 is another major milestone of m88 casino review exchange administration after the SAFE release of the Circular on Further Improving and Adjusting m88 casino review Exchange Administration Policies on Direct Investment (Hui Fa [2012] No.59). Circular No.19 combines and integrates the previous departmental regulations and normative documents, and defines and clarifies the principles of approval throughout various steps of m88 casino review debt registration and administration in a systematic way. Save the registration of signing of m88 casino review debt contracts (which remains to be a SAFE handling), most of other procedures, such as m88 casino review-debt account opening, m88 casino review exchange conversion and repayment of principal and interests of m88 casino review debts, may be processed solely with the banks designated to handle m88 casino review exchange affairs. Circular No. 19 further strengthens the SAFE’s indirect administration mechanism with banks as the major interface. SAFE will primarily depend on the information system for capital account matters to monitor the banks’ m88 casino review debt processing and conduct statistics and analysis of m88 casino review debt situations. This approach, while trying to actively prevent the risks in association with m88 casino review debts, facilitates the borrowing and extension of m88 casino review debts by enterprises in China. We envisage the future trend in m88 casino review exchange administration following the route of “simplifying the procedures while strengthening the supervisions”.

1. Pursuant to the Interim Provisions on Statistics and Monitoring of m88 casino review Debt which comes into effect on March 1, 2003, the borrowing of long-term or medium-term m88 casino review debts by Chinese domestic enterprises or other domestic organizations shall be subject to the approval of quota by the National Development and Reform Commission (NDRC), and the borrowing of short-term m88 casino review debts by Chinese domestic entities shall be subject to the approval and balance control of SAFE.