Member Article

The State Administration of Foreign Exchange (SAFE”) issued the Notice on Issues Relating to the Improvement of the Administration of Foreign Debt on 21 October 2005. The Notice entered into effect on 1 December 2005 and governs various aspects of the PRC regime for the control of foreign debt. Foreign investment below 25% The Notice clarifies the issue of whether a foreign investment enterprise (“FIE”) in which the foreign investor or investors hold less than 25% of the registered capital contributions shall comply with the foreign debt regulations applicable to FIEs or with those applicable to purely domestic enterprises. The Notice specifies that such FIE is to be treated as a purely domestic enterprise for the purpose of foreign debt control. Total investment and registered capital The Notice further addresses the issue of FIEs whose total investment amount is equal to the amount of registered capital, or whose total investment amount has not been specified. If such FIEs wish to take out foreign debt, they are required to apply to their original examination and approval authority to have their total investment and registered capital verified again. After such reverification, the FIEs can borrow foreign debt in accordance with the administration principle of "difference between total investment and registered capital". In other words, such FIEs will be permitted to borrow up to an amount equal to the difference between the total investment amount (as fixed upon reverification) and the amount of registered capital. Holding companies The Notice provides that the maximum foreign debt of a holding company with foreign investment shall be administered in accordance with the following principles: • if it has registered capital of at least US$30 million, the total of its short-term foreign debt balance and the aggregate of its medium and long-term foreign debt may not exceed four times its paid up registered capital; • if it has registered capital of at least US$I00 million, the total of its short-term foreign debt balance and the aggregate of its medium and long-term foreign debt amount may not exceed six times its paid up registered capital. Domestic loans secured by foreign guarantees The Notice changes the registration system for domestic Renminbi loans that are secured with a foreign guarantee. Where the debtor was previously required to register each amount taken out, under the new system the creditor shall carry out registration procedures periodically. The system with respect to such loans is further changed from a system under which the loans were subject to foreign debt administration based on the contracted amount to a new system based on the exercise amount. In other words, the debtor must from now on only carry out foreign debt registration procedures if the foreign guarantee is exercised. Whereas in the past, domestic Chinese-invested enterprises were not permitted to take out Renminbi loans from domestic financial institutions secured by a foreign guarantee, the Notice opens up this possibility. The Notice states that such loans are subject to the approval of the SAFE.