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SAFE Released Ground Breaking Draft Rules Regarding Cross-Border Security

The State Administration of Foreign Exchange of the PRC ("SAFE") released the consultation draft of the Foreign Exchange Administration Rules on Cross-border Security (《跨境担保外汇管理规定(征求意见稿)》) together with the draft operation guidelines (the "Draft Rules") on 13 February 2014 for public comments. In the Draft Rules, SAFE has proposed to reform and liberate the regulatory regime for outbound and inbound security substantially. This paper focuses on the outbound security rules where most of the exciting changes are proposed.

Under the existing rules, most PRC companies must first apply to SAFE for its approval if they wish to provide guarantee/security in favour of an offshore entity (the "Outbound Security"). SAFE will grant the approval on a case-by-case review basis, subject to various shareholding and net asset restrictions. Those PRC companies can formally provide the Outbound Security only after receiving the SAFE approval and must register the same with SAFE within 15 days of its execution. Registration is a condition precedent for the Outbound Security to be valid. On the other hand, PRC banks and a few large PRC companies may provide Outbound Security within the quota pre-approved by SAFE.

The Draft Rules have removed both the approval and the quota requirements. The Outbound Security is still subject to the requirement that it must be registered with SAFE within 15 days of its execution. However, the registration is no longer a condition precedent to the validity of the Outbound Security.

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