New Foreign Debt Regulation Regime Takes Effect On 10 February 2023 - Financial Services

China's new foreign debt regulation regime will take effect on 10 February 2023.

The regime was promulgated by the National Development and Reform Commission ("NDRC") on 10 January 2023 under the Administrative Measures for the Review and Registration of Mid- to Long-Term Foreign Debt of Enterprises (《企业中长期外债审核登记管理办法》) ("Administrative Measures").

Upon taking effect, these replace the NDRC's 2015 Circular on Promoting the Reform of the Filing and Registration Regime for Issuance of Foreign Debt by Enterprises (NDRC Circular 2044/2015) (关于推进企业发行外债备案登记制管理改革的通知》（发改外资[2015]2044 号）) ("Circular 2044").

Compared to Circular 2044 (and related questions and answers published by the NDRC from time to time ("NDRC Q&A Guidance")), key changes in the Administrative Measures are:

1. Both direct and indirect borrowing are subject to foreign debt regulation

The Administrative Measures cover both (a) direct borrowing by any PRC enterprise or any non-PRC enterprise or branch controlled by a PRC enterprise and (b) indirect borrowing by any PRC enterprise.

(a) Direct borrowing

The Administrative Measures clarify the meaning of "control" (控制) for direct borrowing by any PRC enterprise or any non-PRC enterprise or branch controlled by a PRC enterprise as follows (this term is not defined in Circular 2044):

"Control" of an enterprise means:

ownership, directly or indirectly, of over half of the voting rights in that enterprise; or
although not owning over half of the voting rights in that enterprise, having the ability to direct important matters of that enterprise, including but not limited to its business, financial matters, human resources and technology.

(Article 2 of the Administrative Measures)

(b) Indirect borrowing

The Administrative Measures include a new article on indirect offshore borrowing by a PRC enterprise, which covers the issuance of offshore bonds or borrowing of offshore commercial loans etc. by an offshore enterprise where:

the enterprise's main business activities are within the PRC;
the borrower/issuer is an enterprise incorporated outside the PRC; and
the borrowing/issuance is based on the equity interests, assets, revenue or other similar rights of PRC enterprises.

(Article 33 of the Administrative Measures)

This article covers offshore debt of enterprises with a "red chip" structure and offshore enterprises controlled through variable interest entities by onshore enterprises (previously covered by Q31 and 34 of the NDRC Q&A Guidance).

However, it is unclear how "having its main business activities in the PRC" and "borrowing/issuance based on the equity interests, assets, revenue or other similar rights of PRC enterprises" would be interpreted.

In addition, it is not clear on the shareholding or control requirements between the borrower/issuer and the PRC enterprise(s). This article may extend the scope of the foreign debt regulation regime to enterprises not controlled by PRC enterprises or individuals, but have their main business activities in the PRC if the borrowing is based on the equity interests, assets, revenue or other similar rights of PRC enterprises.

2. Clarification on debt instrument types subject to foreign debt regulation

The Administrative Measures refine the scope of debt instruments (债务工具) covered, including but not limited to senior debts (高级债), perpetual bonds (永续债), capital debentures (资本债), medium term notes (中期票据), convertible bonds (可转换债券), exchangeable bonds (可交换债券), finance leases (融资租赁) and commercial loans (商业贷款). (Article 2 of the Administrative Measures).

Compared to Circular 2044 and the NDRC Q&A Guidance, the Administrative Measures expressly cover medium term notes (中期票据), exchangeable bonds (可交换债券) and finance leases (融资租赁), and do not cover preferred stocks (优先股).

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