Having seen steady growth over the last decade, Chinese property developers’ cash flows have shrunk in 2022, and several Chinese high-yield bond issuers relating to the property sector have either defaulted on their US dollar-denominated bonds or deferred repayment with bond exchanges since the start of the year. The authorities are tending towards tightening regulations in the real estate-related financing environment, introducing three principal red lines relating to:

• asset/liability ratio;
• net debt ratio; and
• cash/short-term debt ratio.

Meanwhile, the strict supervision of credit contraction activity is leading to exposure to structural risks and a rapid decline in banks' risk preference, which results in industry-wide "lending reluctance".

Given the U.S. Securities and Exchange Commission's growing list of Chinese companies that face potential delisting from US stock exchanges, an increase in privatisation financing is expected in the future. At the same time, a number of companies still adopt round-trip structures and list in offshore capital markets. As the main assets are located in China, the pre-IPO or restructuring financing usually involves a guarantee provided by the PRC operating entities as well as the collateral located in the PRC to secure the loan.

With regard to the retail loan market, the supervision of loans extended by financiers through the internet has been further refined this year, with the authority encouraging commercial banks to steadily promote digital transformation.

From a macro perspective, the COVID-19 pandemic may have resulted in the country's counter-cyclical adjustment efforts not meeting regular expectations, which will have an effect on banks' credit availability and risk appetite, thereby affecting the pace of asset expansion and net interest margins in the loan market. From a micro perspective, the COVID-19 pandemic has had varying degrees of impact on different industries, companies and individuals, and may affect the development of banking-related businesses and costs.

In response to COVID-19, commercial banks in the loan market are tending to devote their energy to developing full-featured online banks, innovating and updating current products, and gaining small and medium-sized enterprise customers, which is also in accordance with the authority’s policy to support small and medium-sized enterprises during the pandemic.

Although the PRC was the first country to be hit by COVID-19, it was also the first to recover from the pandemic. With the bounce back of the PRC economy, several PRC incorporated companies have come back to the bond market and continued to sell successful deals in different currencies. Whilst high-yield debt issues have yet to become a vital alternative financing source within the domestic PRC market, the overseas markets (including Hong Kong) continues to observe robust demand for PRC or PRC-sponsored issues.

The alternative credit industry offers a lot of opportunities but is also subject to strengthened supervision in the PRC, which may continue for a relatively long time. For example, the regulatory authorities have introduced a series of policies to encourage the development of consumer finance in the past few years. Favourable policies such as lowering the coverage ratio requirement will effectively improve consumer finance companies' profitability and risk mitigation capabilities, and allowing consumer finance companies to carry out the transfer of credit income rights at the banking credit asset transfer registration centre will help them to further expand financing channels and business volume.

A similar trend has been observed in different kinds of alternative credit industries. The increase in financing demands of companies on the supply chain stimulates not only banks granting regular loans, but also factoring companies focusing on supply chain financing. In the context of the country's emphasis on internal circulation, the development of the alternative credit industry can effectively stimulate domestic demand. The favourable regulatory policies have greatly help to build up confidence in the industry.

Several credit funds and other kinds of alternative credit providers have also participated in the direct foreign debt to be granted to companies located in China, or invested in the non-performing loan market.

As a result of the COVID-19 pandemic, both borrowers and lenders now tend to use more comprehensive forms of term sheets or commitment letters to avoid disputes or arguments during the documentation stage.

Having been affected by COVID-19, there is a risk that the regular terms in facility agreements (such as financial undertaking of providing audited financial statements, etc) will not be able to be performed properly. Borrowers are more focused on the level of consent required for specific matters, grace periods, force majeure and other similar carve-outs to be set in the undertaking or event of default clauses.

However, lenders are more cautious when granting such carve-outs or waivers, and tend to seek more frequent reports from not only the borrowers but also any security providers/guarantors, especially on the financial status of such parties.

With the Civil Code of the PRC coming into force at the beginning of 2021, officially confirming the security nature of non-standard security (such as assignment of rights or subordination of inter-company loans), there will be more room for relevant parties to negotiate the credit support arrangement and to be more creative in this area. This may also increase the odds for sponsors to successfully arrange leveraged finance transactions without providing an all-around sponsor guarantee.

Since the implementation of the Civil Code of the PRC and related judicial interpretations and opinions in 2021, many positive changes and innovations have been implemented in financial practice. Such changes include:

• laws to follow for non-standard security;
• clarity of the priority rules of secured property right;
• the expectation of the establishment of a uniform publicity system for movable property mortgages;
• adjustment of independent guarantees and guarantee liability presumption rules; and
• the strengthening of the personal information protection.

These new rules do clear up much of the uncertainty that existed, but it is worth noting that many of the rules are more borrower/security provider-friendly than the old rules, and lenders need to pay more attention to the negotiation of relevant documents to avoid arguments arising around the change in laws.

The PRC authority is stepping up its efforts to promote the development of green loans. Green finance guidelines for the banking and insurance industries have been issued, requiring banks and insurers to:

• increase support for the green, low-carbon and circular economy;
• include ESG requirements into their management processes and comprehensive risk management systems;
• strengthen ESG disclosures; and
• improve relevant policies, mechanisms and process management.

A China-EU Shared Classification Catalogue for Green Finance containing 72 economic activities significantly contributing to climate change mitigation has also been launched, which will help to provide guidelines for the regulation of green finance in the PRC.

Meanwhile, the authority is encouraging product innovation with the promotion of the development of green loans. The authority also tends to direct local lenders to increase the resources that go towards green loans.

Any entity (including banks and non-banks) may provide loans to another company in the PRC. However, carrying out "lending business" (ie, providing loans on a regular basis) in the PRC is restricted to financial institutions or quasi-financial institutions that hold a lending licence granted by the relevant financial sector regulator (eg, banks or micro-lending companies). Determining whether someone is running the risk of conducting “lending business” without the appropriate licence often requires specific case-based analysis.

A foreign lender who makes cross-border loans to a PRC company is not required to be licensed in the PRC. However, it is worth noting that:

• a PRC company that intends to borrow from a foreign lender must have sufficient quota for borrowing loans from foreign lenders (the so-called “foreign debt quota”); and
• the loans borrowed by a PRC company from any foreign lender shall be subject to registration with the State Administration of Foreign Exchange of the PRC (SAFE), and to filing with the National Development and Reform Commission of the PRC (NDRC) if the tenor of such loans is more than one year.

On a related note, the People's Bank of China (PBOC) and SAFE jointly published a regulation in February 2022 to govern offshore lending provided by PRC banks to offshore entities, and imposed a series of restrictions on lending limits, loan purposes, eligible borrowing entities, data reporting requirements, etc.

There are no specific restrictions on the granting of security or guarantees to foreign lenders. However, any security or guarantees granted by a PRC company to foreign lenders that are to secure the liabilities of a debtor incorporated or organised outside the PRC (commonly known as Nei Bao Wai Dai) shall be registered with SAFE.

There are restrictions and controls on foreign currency exchange in the PRC. PBOC and SAFE are the main authorities in charge of foreign exchange controls in the PRC. Generally, the foreign exchange activities in the PRC are divided into two categories: current account activities and capital account activities.

Foreign exchange transactions relating to capital account activities (eg, borrowing from, and granting security or guarantees to, foreign lenders) are more heavily regulated and more strictly controlled than those relating to current account activities, and shall generally be subject to approval by or registration/filing with SAFE.

Generally, the proceeds from loans or debt securities could be used for various purposes, including but not limited to investment in fixed assets, working capital purpose and acquisitions. That said, the proceeds from loans or debt securities borrowed or issued by a PRC company outside the PRC shall, in principle, be used for purposes falling within the business scope of such PRC company as registered with the State Administration for Market Regulation of the PRC.

The concept of agent is recognised under PRC law, pursuant to which the agent may act for and on behalf of the principal(s). The concept of trust under PRC law (which means that the settler entrusts their property rights to the trustee and allows the trustee to administer or dispose of such property in the interest of a beneficiary or for any intended purposes, according to the will of the settler and in the name of the trustee) is not applicable to the holding of security by the security agent for and on behalf of the lenders, and therefore is not commonly used in the loan market.

A loan transfer is essentially the transfer of contractual rights under PRC law. The following generally applies:

• the loan transfer will become effective between the transferor and the transferee as from the date of the execution and completion of the loan transfer between these two parties;
• once the loan is transferred, the benefit of the associated security or guarantees shall be automatically transferred together with the loan; and
• the loan transfer will become effective against the relevant borrower/security provider/guarantor as from the date on which such borrower/security provider/guarantor is notified of such loan transfer.

The transfer of loans is also subject to certain regulatory requirements (eg, the partial transfer of a loan by banks is currently not permitted) and foreign exchange control (eg, a PRC lender may not transfer the loans made to a PRC company to a foreign lender without the approval of SAFE).

There is no prohibition under PRC law on the borrower or sponsor buying back the debt. Debt buy-back shall be subject to the regulatory requirements and foreign exchange control on the loan transfer. Contractual restrictions are often put in place where the buy-back is partial only.

In the acquisition of a company listed in the PRC, the financial consultant of the buyer is required by the regulators to ensure the buyer has the capability to perform its obligations under the acquisition transaction, but there is no PRC law, regulation or rule regarding “certain funds” with respect to the loan facility used to finance the public acquisition finance transactions. There is also no uniform standard regarding the “certain funds” provisions in acquisition finance transactions in the PRC; such provisions could be agreed between the borrower and lender by themselves. In practice, loan documents will often include certain funds provisions that are comparable to those found in the documentation of an international acquisition finance transaction.

No withholding tax will be imposed on the payments of principal, interest or other payments made by a PRC company to lenders incorporated or organised in the PRC.

However, PRC income tax (current rate 10%), value added tax (current rate 6%) and surcharges will be imposed on the payment of interest and fees made by a PRC company to the foreign lenders that are subject to a double-tax treaty that may provide for a lower rate, by way of withholding on such payments.

For loans made by a PRC lender to a PRC company, value added tax (current rate 6%) and surcharges will apply on the payments of interest and fees, and PRC income tax (current rate 25%) shall be paid by the PRC lender on an annual profit basis. For the payment of interest and fees made by a PRC company to foreign lenders, the taxes apply by way of withholding.

No stamp duty or taxation of a similar nature is payable in the PRC in respect of the execution of the security documents or guarantees. Stamp duty in respect of the loan agreement is required to be paid by the borrower and the lender respectively at the rate of 0.005% of the loan amount (to the extent that such lender is a financial institution).

According to PRC law, the rate of interest that can be charged by a lender that is not a financial intuition or quasi-financial institution with a lending licence shall not exceed four times the one-year loan prime rate prevailing as of the date of the loan agreement. There is no law or other rule limiting the amount of interest that can be charged by financial intuitions or quasi-financial institutions with a lending licence.

Overview

The following assets and forms of security are widely adopted by lenders in the loan market:

• mortgage over immovable assets, including real property and construction land-use rights;
• mortgage over movable assets, including machinery, equipment, goods and raw materials, vehicles, aircraft and ships;
• pledge over movable assets; and
• pledge over rights and benefits, including shares and equity interest, deposits, bank accounts, receivables, etc.

Perfection Requirements

Mortgage over immovable assets

A security interest will be created once it is registered with the competent public register. For instance, a mortgage over real property will be created upon the completion of registration with the Real Estate Registration Centre of the Ministry of Natural Resources.

Mortgage over movable assets

A security interest will be created once the mortgage agreement is duly executed by the parties; such security interest cannot be claimed against any bona fide third party without registration.

Pledge over movable assets and financial instruments

A security interest will be created from the date of delivery of such movable assets, and the title certificate of bills of exchange, promissory notes, checks, bonds, certificates of deposits, warehouse receipts or bills of lading. For a pledge over financial instruments, in the absence of a certificate, a pledge will be created upon the completion of registration with competent authorities.

Pledge over rights and interest

For a pledge over shares and equity interest, or intangible assets such as intellectual property and receivables, the security interest will be created upon registration with competent authorities.

Unified Registration of Security Created Over Movable Property and Rights

Since 1 January 2021, the relevant parties can access the Movable Property Financing Unified Registration and Publication System of the Credit Reference Centre to register the following types of security:

• mortgage of production equipment, raw materials or semi-finished products;
• pledge of receivables;
• pledge of deposit certificates, warehouse receipts or bills of lading;
• finance lease;
• factoring;
• title retention; and
• other registrable security created on movable property and rights, but excluding the mortgage of vehicle, ship or aircraft and the pledge of bond, fund shares, equity interest and property rights of the intellectual property.

Timing

Although there is no specific time requirement for all such registrations, it is advisable for lenders to require the obligors to complete the formalities as soon as reasonably practical, to ensure the creation of the security interest, ranking in priority and right against the bona fide third party.

Stamp Duty

Security documents are not subject to stamp duty or other taxes of a similar nature in the PRC.

Registration Fees

Depending on the type of security interest, some registrars may charge a registration fee, either based on the value of the collateral or as a lump sum, although such registration fees are not substantial.

Under PRC law, a floating mortgage can be created over the mortgagor's current and future manufacturing machinery and equipment, raw materials, semi-finished products and products.

Before crystallisation, the floating mortgage will not restrict the mortgagor's right to dispose of the mortgaged assets. Crystallisation will occur under the following circumstances:

• non-payment by the debtor;
• the mortgagor is declared insolvent or dismissed;
• any event as mutually agreed by the parties to realise the mortgage; and
• other circumstances that have a severe impact on the realisation of the secured indebtedness.

Exception to Priority in Ranking

Where an asset falling within the scope of the floating mortgage has been purchased by a purchaser at a reasonable price through the mortgagor’s normal business activities, the security interest created on that asset cannot be claimed against the right of the purchaser.

For those assets of the mortgagor that are purchased or leased by way of finance lease after the creation and registration of the floating mortgage, where any mortgage or similar security is created over those assets to secure the consideration or rent payable and is registered within ten days after the delivery of that asset, the following interests will rank prior to the floating mortgage:

• the mortgage created in favour of the seller and the right of the seller in the title retention arrangement;
• the mortgage created in favour of the creditor financing the consideration; and
• the right of the lessor who leases that asset by way of lease.

Downstream, upstream and cross-stream guarantees are generally permissible under PRC law, provided that the guarantor has taken all necessary corporate actions to authorise the execution of the guarantee.

As for the provision of upstream guarantees to guarantee the liabilities of a shareholder or ultimate controller, the shareholders’ resolutions of the guarantor shall be required. If such guarantor has more than one shareholder, the principal debtor-shareholder, or the shareholder that is controlled by the principal debtor/ultimate controller, shall have no voting rights in the passing of the relevant shareholders’ resolutions.

Special Requirement for Listed Company

For a listed company incorporated in the PRC (or any of its material subsidiaries that have been disclosed), the provision of security and guarantees must be evidenced by a relevant public announcement in relation to the passing of internal resolutions. In the absence of such public announcement, the listed company or its material subsidiaries may claim against the creditors on the validity of such security and guarantees in legal proceedings.

Special Requirement for State-Owned Enterprises

Where a state-owned enterprise is to provide security or guarantees for its subsidiaries, it may be subject to a requirement that the portion of liabilities secured or guaranteed by it does not go beyond the proportion of its shareholding in that subsidiary. Moreover, under certain circumstances, approval from or filing with the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) will be required, pursuant to regulations or guidelines promulgated by SASAC or its local branch.

On 9 October 2021, SASAC promulgated the Circular on Strengthening the Administration of Central Enterprises’ Providing Guarantee and Security (the “Circular”) to regulate the provision of guarantees and security of central enterprises. In this Circular, it is made clear that:

• an implicit guarantee (co-borrowing contract, deficiency supplement commitment, comfort letter, etc) shall also be regulated as a guarantee, insofar as it has the effect of a guarantee;
• central enterprises are strictly prohibited from providing guarantees and security in any form to secure the obligations of enterprises that:
1. are outside the group and have no equity relationship with such central enterprise;
2. have entered into reorganisation or bankruptcy proceedings;
3. are insolvent;
4. have been suffering losses for no fewer than three consecutive years; and
5. are financial institutions;
• central enterprises should strictly control the scale of providing guarantees and security so that such provision does not exceed 40% of the consolidated net assets of the group, and the scale for providing guarantees and security of the central enterprise or any of its subsidiaries shall not exceed 50% of the net assets of such enterprise. The total scale of providing security and guarantees for the financing of an enterprise included in the annual debt risk control scope of SASAC shall not increase compared with the previous year; and
• central enterprises should strictly control the guarantee/security beyond the proportion of shares. In principle, a central enterprise can only provide guarantee or security for its subsidiaries and enterprises in which it holds shares strictly in accordance with the proportion of shares it holds over such enterprises. Where it is indeed necessary to exceed the proportion, such shall be reported to the board of directors of the group for approval. Also, for the guaranteed/secured amount exceeding the proportion of shares, counter security with sufficient and realisable value shall be provided by a minority shareholder or a third party through mortgage, pledge or other means.

It is generally acceptable for the target to provide security, guarantees or financial assistance in favour of the acquirer in an acquisition transaction, subject to the conditions discussed in 5.3 Downstream, Upstream and Cross-Stream Guarantees in respect of upstream guarantees.

There is a particular requirement for the provision of cross-border security or guarantees – please see 6.4 A Foreign Lender’s Ability to Enforce Its Rights.

Security will be released upon:

• the discharge of secured liabilities;
• the realisation of the security;
• the secured creditor waiving its interest over the collateral; or
• the occurrence of other circumstances under which the security will be discharged as prescribed by law.

In practice, for the purpose of deregistration with the relevant registration authority, the parties will enter into a bilateral release agreement or the secured creditor will issue a confirmation letter to the security provider, confirming the release of security interest, based on which the security provider can request the relevant registration authority to process the deregistration.

Competing Security Interest

Rules for competing mortgages/pledges

Where there are multiple mortgages/pledges created over a collateral, the priority will be determined as follows:

• by the registration order if all security interest has been registered;
• where some security interest has been registered while some remains unregistered, those registered shall rank in priority to those unregistered security interest; and
• where no registration has been made, all interest shall rank in the same sequence and proceeds obtained through auction or sale of collateral shall be applied towards payment pro rata of all secured indebtedness.

Rules for competing mortgages and pledges

Where both mortgage and pledge are created over a collateral, the priority will be determined by order of registration of the mortgage, and delivery of that asset to the pledgee.

Rules for competing mortgages, pledges and lien

Where a mortgage, pledge and lien simultaneously exist over a movable asset, the lien will rank ahead of the mortgage and pledge.

Subordination

Under PRC law, contractual subordination may be reached by agreement among all the creditors. In its simplest form, the senior creditors (typically the lenders), the junior creditors (typically the shareholders of the borrower) and the borrower (if required by the creditors) will enter into an inter-creditor agreement or a subordination agreement which stipulates that, unless otherwise permitted by the agreement or with the prior written consent of the senior creditor, all the indebtedness owed to the junior creditors and the right of the junior creditors in respect of that indebtedness shall be subordinated to the indebtedness owed to the senior creditors and be postponed to the right of the senior creditor in respect thereof.

Subject to the mandatory statutory principle of the order creditors are paid on insolvency and the right of revocation conferred to the insolvency administrator under the insolvency law, the contractual subordination shall remain effective in insolvency proceedings. As between the senior creditors and the junior creditors, their subordination arrangements are generally given effect notwithstanding the borrower’s insolvency.

Upon the occurrence of non-payment by a debtor or events to realise a security interest as agreed by the parties in the security documents, the secured lender may take the following measures to enforce its security interest, without recourse to the PRC court:

• take possession of the collateral agreed upon by the security provider;
• instruct the security provider to sell or directly sell the collateral to a designated third party; or
• instruct the security provider to sell or directly sell the collateral by way of public auction.

If the proceeds obtained from the abovementioned steps exceed the secured indebtedness, the portion that exceeds the secured indebtedness should be attributable to the security provider.

Special Procedure on Enforcement of Security Interest

PRC law provides for a special procedure on the enforcement of security (the “Realisation Procedure”), in which the secured lender may directly apply for enforcement of the security by submission to the court with jurisdiction. Since the Realisation Procedure is a non-litigious proceeding, the court may, at its discretion, only conduct prima facie review on the evidence submitted to prove the existence of secured indebtedness, the creation of a security interest and the occurrence of an event of default, etc.

If there is a substantive dispute between the secured lender and the security provider (such as the secured indebtedness, or whether any event of default has occurred, etc), the application of the Realisation Procedure will be dismissed and the court will inform the parties to settle their dispute by initiating a litigation procedure.

Restrictions

Lenders may be faced with the following restrictions in the enforcement of a security interest.

• Ranking in priority: besides the limitations set out in 5.7 Rules Governing the Priority of Competing Security Interests, if the collateral has been mortgaged to other beneficiaries with a prior ranking, the enforcement of security may be subject to the consent of the beneficiaries with a prior ranking, even though the relevant collateral has already been seized by the beneficiary applying for enforcement.
• Enforcement of security over construction in progress: the creditor rights of other parties are generally subordinated to the payment of construction works to contractors.

Choice of Law

Under PRC law, only contracts connected to foreign-related transactions may choose a foreign law as governing law, provided that such choice of law does not contravene the mandatory requirements under PRC laws and does not jeopardise the public interest of the PRC.

Submission to a Foreign Jurisdiction

Generally speaking, the parties are free to submit a dispute related to a foreign-related contract to a foreign court that has an actual connection with the underlying transaction, provided that the PRC court has no exclusive jurisdiction over that dispute. For example, PRC courts shall have exclusive jurisdiction for disputes arising from the performance of a Sino-foreign joint venture, a Sino-foreign co-operative enterprise, a Sino-foreign co-operative exploration or the development of natural resources contracts within the territory of the PRC mainland.

Recognition and Enforcement of Foreign Arbitral Awards

As the PRC is a contracting state to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”), arbitral awards rendered by arbitral tribunals through institutional arbitration proceedings in another contracting state shall be recognised and enforceable in the PRC, unless they fall within the circumstances set forth under the New York Convention whereby a contracting party may be entitled to refuse to recognise and enforce an arbitration award.

Recognition and Enforcement of Foreign Judgment

In brief, when determining whether a foreign civil judgment will be recognised and enforced, PRC courts rely on the following six standards:

• the foreign judgment in application must be final and effective;
• pursuant to applicable foreign laws, the court rendering the judgment must have jurisdiction over the case;
• pursuant to applicable foreign laws, the litigation procedure conducted in the foreign court must be fair and legitimate – for instance, the respondent has been duly served and is given the opportunity to be heard, etc;
• conflicting judgments do not exist – PRC courts do not hear any case with identical parities for the same subject matter, or in which an effective judgment has not been issued, nor do they recognise a third-country judgment of the same case;
• international treaties or reciprocity exist between the PRC and the other country for the mutual recognition and enforcement of civil and commercial judgments; and
• recognition and enforcement of such judgment do not contravene the fundamental principles of PRC law or sovereignty, security or the public interest.

In general, there is no restriction on the enforcement of a foreign lender’s rights under a loan agreement or security agreement, provided that all the registration, filing or other similar formalities as required for cross-border transaction have been duly completed, including but limited to the following (as applicable).

Foreign Debt Registration

A PRC enterprise is generally required to register its offshore borrowing or offshore debts issue with SAFE no later than three business days prior to utilisation. Any non-financial enterprise incorporated in the Greater Bay Area may apply for once-for-all foreign debt quota registration with SAFE to avoid one-by-one registration with SAFE, subject to meeting relevant requirements from SAFE.

NDRC Filing

A PRC enterprise is required to conduct filing with NDRC in respect of offshore borrowing or offshore debts issue by it and any offshore entity or branch controlled by it (in each case with a tenor over one year, exclusive of being exactly one year).

Cross-Border Security Registration

A PRC enterprise is required to register with SAFE for its provision of cross-border security and guarantees to secure the indebtedness owed by an offshore borrower to an offshore lender within 15 business days from the date of the relevant security or guarantee agreement. Although failure to complete this registration will not impact the validity of the security and guarantee agreement, the outbound remittance of proceeds obtained through the enforcement of such security or guarantee may be restricted without such registration.

Although there is no unified legislation to regulate company rescue or reorganisation procedures outside of judicial insolvency proceedings, creditors' committees among banking financial institutions have become a common mechanism for dealing with the debt of financial institutions since the issuance of Circular No 1196 by the China Banking and Insurance Regulatory Commission (CBIRC) in 2016.

A creditors’ committee is an ad hoc organisation set up by at least three banking financial institutions that are the creditors of a company experiencing large-scale difficulties in repaying loans, bonds or other debts. The members of the creditors' committee are limited to creditors that are banking financial institutions, financial institutions approved by CBIRC and other financial institutions approved by regulatory authorities other than CBIRC.

Based on negotiations and self-discipline, members of the creditors' committee will form a joint credit management mechanism and make concerted efforts to facilitate debt restructuring and resolve debt crisis.

When the application for insolvency has been accepted by the court, the following may occur in the exercise of the lender’s rights.

• Automatic acceleration of debt – all the debt of the insolvent company that remains outstanding shall immediately become due and payable.
• Calculation of the interest ceases – upon acceptance of the insolvency application by the court, the calculation of the interest of all the debt shall cease immediately.
• Suspension of enforcement of security during judicial reorganisation procedure – if a security provider is involved in a judicial reorganisation procedure, the enforcement of the security interest will be suspended, unless the secured asset is likely to be damaged or its value might be significantly reduced, or there are other circumstances that will jeopardise the creditor’s rights.

Secured Indebtedness

A secured creditor who has security interest over a specific asset of the insolvent company shall have priority over the collateral. However, if the proceeds obtained from the enforcement of security are insufficient to discharge all the secured indebtedness, the remaining unsettled liabilities should be treated as unsecured indebtedness.

Unsecured Indebtedness

After the discharge of all the insolvency costs and expenses and the collective debts, the remaining insolvency proceeds shall be applied in the following order:

• payments to employees, including wages and compensation owed;
• other social insurance expenses and unpaid taxes; and
• unsecured indebtedness owed to normal creditors.

Where the insolvency proceeds are insufficient to discharge all the liabilities in the same order, the payment shall be made on a pro rata basis.

There is no concept of equitable subordination under PRC laws. All creditors are allowed to declare creditors' rights when the debtor goes into insolvency.

Restriction on Separate Settlement

The insolvency administrator is entitled to apply to the court for revocation of a separate settlement made by the insolvency company with the creditor within the six months prior to the date of the court accepting the insolvency application, unless such separate settlement is made to benefit the assets of the insolvency company.

Revocation by the Insolvency Administrator

If the insolvent company does any of the following within one year prior to the date the court accepts the insolvency application, the insolvency administrator may apply to the court for revocation:

• transfers its assets without any consideration;
• sells its assets at an obviously unreasonable price;
• provides security for an unsecured indebtedness;
• makes early redemption on undue liabilities; or
• waives any debts owing to it.

Project finance was introduced to the PRC in the 1980s and has been developing rapidly following the economic reform and opening up of the infrastructure construction sector since the 1990s.

The public-private partnership (PPP) model is currently most popular in the project finance market in the PRC. Based on the data disclosed in the National PPP Information Platform, as of 18 August 2022 there were 10,312 PPP projects in the database nationwide, with a total investment of RMB16.37 trillion, covering 19 sectors, including energy, transportation, water resources, affordable housing, tourism, medical care and public health, education and government infrastructure.

Project finance in the PRC is not subject to a specific legal framework; projects of different natures will be subject to different requirements. Please see 8.3 Government Approvals, Taxes, Fees or Other Charges.

Modes of PPP Transactions

There are four modes of PPP in the PRC:

• BOT (build–operate–transfer);
• BOOT (build–own-operate–transfer);
• BTO (build–transfer–operate); and
• BOO (build–own-operate).

BOT has long been the most widely adopted mode. These modes will be used according to the repayment sources of projects, as follows:

• BOT or BOOT for projects that have a steady project revenue to cover all the investment costs and expenses;
• BOT or BOO for projects that lack sufficient project revenue and rely on government subsidy; and
• BOO is recommended by NDRC for non-profit projects, accommodated with procurement by government.

BTO is often seen in public utilities projects.

Supervising Administration and Restrictions

The PPP mode mainly applies to public service and infrastructure projects that are suitable for market-driven operation, such as electricity, water supply and public transportation, in which the franchisee will be selected through a formal tender process or competitive negotiations. NDRC recommends that the PPP mode should be the first choice for the construction of new municipal engineering and urbanisation pilot projects.

In the PRC, PPP transactions are under the supervision of NDRC, the Ministry of Finance and other regulatory authorities based on the nature of each project, including the Ministry of Housing and Urban-Rural Development, the Ministry of Transport, the Ministry of Water Resources and PBOC.

To implement the general principle of balance between risks and returns in supervising PPP transactions, the PRC government and any governmental authorities are prohibited from repurchasing the share capital of private entities, indemnifying any loss suffered by private entities, or giving any kind of undertaking on a fixed return. A PPP transaction may also be subject to further limitation due to its location and industry.

Governmental Approval

In general, the following formalities need to be completed for a project:

• project filing/approval from NDRC;
• approval of environmental impact analysis from the Ministry of Ecology and Environment (MEE), subject to any exemptions set out under the applicable laws and regulations;
• land use right obtained from the PRC government, land plan permit and project plan permit issued by the Municipal Planning and Natural Resources Bureau of the Ministry of Natural Resources and project construction permit issued by the Ministry of Housing and Urban-Rural Development; and
• any other formalities required, depending on the nature and location of a project.

Taxes, Fees or Other Charges

The tax regime governing project finance transactions is generally the same as for other commercial loan transactions, as set out in 4. Tax.

Transaction Documents

The governing law of the transaction documents for projects implemented in the PRC will generally be PRC law. It might not be necessary to register or file the transaction documents with a governmental authority, subject to those formalities required under cross-border transactions (see 6.4 A Foreign Lender’s Ability to Enforce Its Rights) or the perfection requirements for the creation of security (see 5.1 Assets and Forms of Security).

The government bodies generally responsible for the initiation, implementation and supervision of oil and gas, power and mining projects are as follows:

• NRDC is responsible for the planning of key construction and infrastructure projects and has the authority to approve all fixed-asset investment projects;
• the Ministry of Natural Resources is authorised to grant permits and licences for the exploration and extraction of oil and gas and mineral resources;
• the National Energy Administration of NDRC is responsible for the supervision of the energy market (including oil, gas and electricity power) and the formulation of national plans for the development of energy infrastructure; and
• the MEE deals with environmental issues related to the utilisation and exploitation of energy and resources.

The first issue a foreign investor should consider when structuring a project is whether the business sector of the project has any foreign investment restrictions. Foreign investment control in the PRC adopts a “Negative List” mechanism, whereby NDRC and the Ministry of Commerce will issue and update a list of industrial sectors and business types that are prohibited to foreign investors or that restrict foreign controlling. According to the latest Negative List promulgated by NDRC and the Ministry of Commerce in 2021, such prohibited sectors include the prospecting and mining of rare earth, radioactive minerals and tungsten, etc. Some areas restrict foreign controlling – for example, nuclear plants must be controlled by domestic investors.

Foreign investors should also consider the bankability of the project and the related contractual arrangements. Domestic banks are usually more willing to rely on the credit of sponsors instead of only on the project assets and revenues. When assessing the bankability of the project, the investors should therefore conduct a thorough and comprehensive risk analysis to properly allocate the risks in the transaction documents.

The most traditional financing sources of project finance transactions are term loan facilities provided by a single institution or a consortium of policy banks, commercial banks or other financial institutions. In the past few years, participants in the project financing market have become more diversified, with social security funds, insurance funds and other public funds being permitted to be involved in project financing through debt, equity investment and other ways. Meanwhile, the project owners of large-scale infrastructure projects are considering using more sophisticated structured financing instruments such as project revenue bonds, Green Bonds, Green ABS and REITs as alternative financing sources.

In general, financing on all types of projects will be subject to meeting the requirements on debt-to-equity ratio (no higher than 80:20), which may be adjusted from time to time by the PRC government according to the market situation.

Ownership and Acquisition of Natural Resources

Natural resources within the territory of the PRC are owned exclusively by the state, including minerals, oil and gas. Relevant permits and licences are required for the exploiting, acquiring and using of such natural resources (see 8.4 The Responsible Government Body).

Export of Natural Resources

PRC law applies quota administration and export administration for export control. Goods with specific quantity restrictions can only be exported within the limited quantity, while an exporting licence will be required for other goods subject to export restrictions.

The goods subject to export restrictions are regulated under the list of goods subject to quota and the list of goods subject to the requirement of an export licence, each of which are published by the Ministry of Commerce on an annual basis.

According to such lists, natural resources including coal, oil and various rare minerals cannot be exported without complying with relevant requirements.

Responsible Regulatory Bodies

The MEE is responsible for reviewing and approving the environmental impact assessment reports of projects, monitoring project companies' compliance with environmental protection laws and policies, and supervising the installation and acceptance of necessary waste prevention and treatment facilities within construction projects.

The National Health Commission and the Ministry of Emergency Management are the regulatory authorities overseeing health and safety issues in the PRC.

Applicable Laws and Regulations

The main environmental laws applicable to projects in the PRC are the Environment Protection Law, the Environmental Impact Assessment Law and the Fire Protection Law. Depending on its nature, a project in the PRC may also be subject to legislation on air pollution, sustainable development, waste management, water protection, soil protection, noise pollution, etc.

As for health and safety issues, the Law on Prevention of Occupational Diseases and related implementing rules and guidelines serve an important role in regulating employers’ obligation to ensure the health and safety of employees. Based on the nature of a project, certain sector-specific laws and regulations may also apply.