Law and Practice of Debt Finance in Modern China : Cross-border Perspectives

This book provides updated, full-picture analysis of the laws and practices of cross-border debt finance in the PRC. It is featured by the first-handed experiences of the author’s academic research and legal practice in this field over two decades. The author discusses legal and regulatory issues, transaction structures and documentation in relation to two debt finance products: loan and bond, covering the inbound structure (Chinese debtors’ raising funds from the international market) and the outbound structure (Chinese creditors’ supplying funds to the international market). For cross-border loans, this book thoroughly illustrates the foreign debt regulatory regime in the PRC and approaches the lending by Chinese banks to support exports and overseas investments under the “Belt and Road Initiative” (BRI). For cross-border bonds, it discusses how Chinese issuers, by designing various transaction structures, enter into the international bond market, and then researches the “opening-up” of Chinese bond market to both international issuers (for issuing “Panda Bonds”) and investors (for purchasing Chinese bonds). This book is used as an authoritative source for not only students and researchers, but also bankers and legal practitioners, who are interested in the Chinese debt finance market. Series Editor’s Preface: A Wisdom Was Passed, While His Academic Big Fruits Are Still Alive 6 Preface 11 Contents 14 About the Author 19 Abbreviations 20 List of Diagrams 22 List of Tables 24 1 Introduction 25 1.1 Purposes of This Book 25 1.2 Framework of the Cross-Border Debt Finance in China 27 1.3 Methodologies of This Book 28 1.4 Statements on Terminologies, Laws and Information 29 2 Borrowing Foreign Debts: Loans 31 2.1 What Are “Foreign Debts”? 31 2.1.1 Definition of Foreign Debts Under PRC Law 31 2.1.2 SAFE’s Data on Foreign Debts 38 2.2 Who Can Borrow “Foreign Debts”? 43 2.2.1 The State Council and the Ministries 43 2.2.2 Local Governments 44 2.2.3 Financial Institutions 47 2.2.4 Domestic Enterprises 49 2.2.5 Foreign-Invested Enterprises (“FIEs”) 50 2.3 Foreign Debt Quota and Foreign Debt Registration 52 2.3.1 Foreign Debt Quota 52 2.3.2 Foreign Debt Registration 69 2.4 Cross-Border Loan Documentation: Legal and Practical Issues 72 2.4.1 Governing Law 73 2.4.2 Term Sheet 74 2.4.3 Loan Agreement 75 2.4.4 PRC Legal Opinion 76 3 Borrowing Foreign Debts: Guarantee and Security Interests 77 3.1 Chinese Legal Framework for Guarantees and Security Interests 77 3.2 Guarantee 83 3.2.1 Creation of Guarantee 83 3.2.2 Guarantors 86 3.2.3 Types of Guarantees 87 3.2.4 Statutory Rights of Guarantor 91 3.2.5 Scope of Guaranteed Obligations 93 3.2.6 Invalidity Issues 93 3.2.7 Guarantee Period 94 3.2.8 Guarantee Liability and the Main Contract 96 3.2.9 Capacity Issues 97 3.3 Security Interests 101 3.3.1 Mortgage 101 3.3.2 Pledge 109 3.3.3 Lien 113 3.3.4 Priority of Security 114 3.3.5 Structural Subordination 114 3.4 Quasi-Security 115 3.4.1 Deposit 115 3.4.2 Title Retention 116 3.4.3 Financial Leasing 117 3.4.4 Factoring 117 3.4.5 Security Assignment 118 3.5 SAFE Outbound Guarantee and Security Interests 120 3.5.1 The Concept of Cross-Border Guarantee and Security Interests 120 3.5.2 Outbound Security 123 3.5.3 Inbound Security 123 4 Financing International Transactions by Chinese Banks 125 4.1 Cross-Border Financing by Chinese Banks 126 4.1.1 Categories of Cross-Border Financing 126 4.1.2 Chinese Banks for the Financial Support of the BRI 128 4.1.3 Development Financing Products Box 132 4.1.4 Data and Information on Chinese Banks’ Overseas Financial Assets 132 4.2 Export Credit Loans by Chinese Banks 138 4.2.1 Definition of Buyer’s Credit 138 4.2.2 Structures and Documentation in a Chinese Export Credit Transaction 141 4.3 Project Financing by Chinese Banks 151 4.3.1 Project Financing with a Chinese Feature? 151 4.3.2 Structure and Documentation in International Project Financing Funded by Chinese Banks 153 4.3.3 Case Studies 156 4.4 Sinosure and the ECA Cover 160 4.4.1 Background of Sinosure 160 4.4.2 Selected Sinosure Products 162 5 Issuing International Bonds 170 5.1 Chinese Issuers in the International Bond Market 170 5.1.1 Types of Chinese Issuers 170 5.1.2 Market Information and Data 173 5.2 Main Structures of Issuing International Bonds by Chinese Issuers 181 5.2.1 Direct Issuance Structure 183 5.2.2 Outbound Guarantee Structure 186 5.2.3 SBLC Structure 188 5.2.4 Keepwell Structure 190 5.3 Legal and Regulatory Matters for Issuing International Bonds by Chinese Issuers 193 5.3.1 NDRC 193 5.3.2 PBOC and SAFE 201 5.4 Legal Documentation and Parties 201 5.4.1 Parties 201 5.4.2 Legal Documentation 203 6 Accessing the Chinese Bond Market: Panda Bonds 207 6.1 Chinese Bond Market 207 6.2 Panda Bonds 211 6.2.1 History and Evolution 211 6.2.2 Main Rules for the Panda Bond Market 213 6.2.3 Market Information and Data 214 6.3 Legal and Regulatory Issues for the Panda Bonds in the CIBM 216 6.3.1 Issuers 216 6.3.2 Regulatory Authorities 218 6.3.3 Application Documents and Process 219 6.3.4 Information Disclosure 223 6.3.5 Accounting and Auditor 224 6.3.6 Credit Rating 226 6.3.7 Use of Proceeds 227 6.3.8 Governing Law and Choice of Jurisdiction 227 6.3.9 Tiered Management System for Corporate Issuers 228 6.3.10 Legal Documentation and Parties 230 6.3.11 SPV Issuer 231 7 Accessing the Chinese Bond Market: Bond Investment 232 7.1 Accessing the Chinese Bond Market: History and Evolution 232 7.1.1 Evolution of the Investment Mechanisms 232 7.1.2 Current Status 237 7.2 QFII/RQFII 238 7.2.1 Evolution of the QFII/RQFII Mechanism 238 7.2.2 Application and Operation of QFII/RQFII 240 7.2.3 Scope of Investments 242 7.3 CIBM 243 7.3.1 Evolution of the CIBM Mechanism 243 7.3.2 CIBM Direct 244 7.4 Bond Connect 246 7.4.1 Evolution of the Bond Connect Mechanism 246 7.4.2 Operation of the Bond Connect 247 7.5 Summary 251 8 The Future of Cross-Border Debt Finance in China: Conclusions 253 8.1 Increasing Liberalization and Simplification of Foreign Debt Regulation 253 8.2 Towards a Unified Foreign Debt Regulatory Regime 255 8.3 Attraction and Supply of Funds 257 Appendix A China’s Foreign Debts: Data and Information 259 The Structure and Growth of Long-Term and Short-Term Foreign Debts in China from 2010 to 2020 (Unit: US$1 Billion) 262 Appendix B Form of Enterprise Overseas Debt Issuance Filing and Registration Certificate 264 Appendix C The Flowchart for Applying for the NDRC Foreign Debt Quota 265 Appendix D Form of SAFE Foreign Debt Registration Status Form 266 Appendix E Form of NDRC Post-issuance Filing Form 269 Appendix F Sample Term Sheet of Cross-border Loan with One Chinese Borrower 271 Appendix G Structure and Framework of Cross-border Loan Agreement with a Chinese Borrower 275 Appendix H Form of SAFE Outbound Security Registration Form 283 Appendix I Skeleton of Offering Circular for One Chinese Issuer 288 Appendix J Skeleton of Subscription Agreement with One Chinese Issuer 304 Appendix K Skeleton of Trust Deed with One Chinese Issuer 308 Appendix L Sample PBOC Approval Letter for One Panda Bond Financial Institution Issuer 314 Appendix M Sample NAFMII Notice of Registration Acceptance for a Corporate Issuer of the Panda Bonds 316 Appendix N Skeleton of Prospectus for One Panda Bond Issuer Prospectus 319 Appendix O Skeleton of Underwriting Agreement for One Panda Bond Issuer 324