Ince&Co International Law Firm

SAFE Approval and Registration of PRC Bank Refund Guarantees

Monday 06 October, 2008

On 1 August 2008, the State Council approved a draft Amendment to the Regulation of the People’s Republic of China on Foreign Exchange Administration (the “2008 Amendment”). The 2008 Amendment came into effect on 5 August 2008. The 2008 Amendment has created widespread misunderstanding that, as of 5 August 2008, in addition to the existing requirement of registration with the State Administration of Foreign Exchange (“SAFE”) in respect of foreign currency refund guarantees (RGs), there has also been a new requirement to obtain SAFE approval prior to the issuance of RGs.

We are of the view that the 2008 Amendment does not create a new SAFE approval requirement for refund guarantees, in that both SAFE approval and SAFE registration had been required prior to the 2008 Amendment.

The position prior to the 2008 Amendment
The 1997 Amendment to the Regulation of the People’s Republic of China on Foreign Exchange Administration (the “1997 Amendment”) provides that:

“foreign currency guarantees can be issued only by financial institutions and enterprises meeting conditions stipulated by State regulations and with approval from SAFE.”

Other than the 1997 Amendment, there are rules which provide further guidelines for the issuance of RGs, including the Procedures for Administration of Guarantees overseas by institutions within the Chinese Territory, together with its Detailed Rules for Implementation. In accordance with those rules, Chinese banks can only issue RGs following approval of SAFE.

The general position is that Chinese banks hold a “blanket” approval (which may entail certain conditions) from SAFE to issue RGs. In other words, Chinese banks are not required to seek additional SAFE approval on a case by case basis prior to the issuance of each individual RG. However, in respect of foreign currency, Chinese bank guarantees for financing, finance leases, deferred payments that exceed one year and cash performance guarantees for accounts under compensation trade, it is necessary to seek prior SAFE approval on a case by case basis and the blanket approval referred to above does not apply.

We believe that the misunderstanding in relation to the requirements for SAFE approval may have originated from “the Reply of SAFE regarding the interpretation of the Procedures for the Administration of Guarantees overseas by institutions within the Chinese Territory” (the “Reply”), which was issued by SAFE on 29 August 1999. There is a provision in the Reply which states that:

“Chinese banks may issue non-financing guarantees overseas without the prior approval of SAFE but such guarantees must be registered with SAFE...”

The above extract of the Reply indicates that Chinese banks can issue RGs “without the prior approval of SAFE”. However, when the Reply is considered in its entirety, the correct interpretation of the above extract is that Chinese banks may merely issue non-financing guarantees (such as RGs) without SAFE approval being required on a case by case basis.

The current position
From 5 August 2008, the relevant provision in the 1997 Amendment was amended to:

“an institution shall apply to a foreign exchange administrative authority before providing foreign guarantee. The foreign exchange administrative authority shall make a decision of approval or disapproval according to the asset-liability situation of the institution. The institution shall, after concluding a foreign guarantee contract, apply to SAFE for foreign guarantee registration.”
Whilst the 2008 Amendment supersedes the 1997 Amendment and other relevant rules, the Detailed Rules for Implementation remain unchanged. This means that the detailed rules governing SAFE approval and SAFE registration of RGs remain unchanged. The 2008 Amendment is no more than a brief summary of the requirements under the 1997 Amendment and the relevant rules aforesaid. Equally, the 2008 Amendment has not altered the requirement that all Chinese bank RGs must be registered with the relevant SAFE authority follow issuance.

Conclusion
It is incorrect to adopt the view that SAFE approval to issue RGs was not required prior to the 2008 Amendment coming into effect. The former requirements that both SAFE approval and SAFE registration are required, remain unaltered. There also remains no regulation to the effect that each and every RG will now be subject to SAFE approval on a case by case basis prior to issuance.

September 2008
For further information on this subject please contact Paul Ho at our Shanghai office on paul.ho@incelaw.com, David Beaves at our Hong Kong office on david.beaves@incelaw.com or your usual Ince contact.

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