In order to encourage domestic institutions to go global, to satisfy the demand for policies concerning domestic credit support for overseas investment enterprises, and to further facilitate the process of trade and investment, the State Administration of Foreign Exchange has recently issued the Circular on Issues Concerning the Administration of External Guarantees Provided by Domestic Institutions (hereinafter referred to as the Circular), and the Circular shall come into force as of the date of its promulgation.

The Circular mainly covers the following issues: first, relaxing the qualification requirements for the guaranteed party and expanding the business scope of the external guarantees. The banks shall provide external guarantees for the financing, and the guaranteed parties are free from limiting factors such as stock equities, a proportion of the net assets, and the profitability of domestic institutions. Where external guarantees are provided by non-bank financial institutions, the guaranteed parties shall be either corporate bodies legitimately registered within China or enterprises that are domestic institutions, pursuant to the procedures for overseas investments, incorporations, or the holding of shares, either directly or indirectly, overseas. Where external guarantees are provided by the enterprises, the guaranteed party may be an enterprise which the guarantor, pursuant to the prescribed procedures, incorporates, or holds shares of, either directly or indirectly, at home or overseas.

Second, lessening the requirements for financial indexes of the guarantor as well as the profitability of the guaranteed party. If external guarantees are provided by the enterprises, the proportion of net assets to the total assets thereof uniformly shall be no less than 15 percent; the amount of the guaranteed partys net assets shall be positive, and the requirements for profitability will be changed from no losses permitted to profits within one of the past three years. (For long-term projects like resource development, profits achieved in at least one of the past five years may be allowed.)

Third, making adjustments to the scope of administration and the method for verification of the balance quotas for external guarantees. All external guarantees for financing purposes provided by banks for domestic and overseas institutions shall be incorporated in the administration of the balance quotas. Upon arrival, the administration of the balance quotas may be carried out on the external guarantees for financing or non-financing purposes of non-bank financial institutions and enterprises. Theoretically, the balance quotas for external guarantees provided by the banks shall not exceed 50 percent of the bankspaid-in capital combined with RMB and foreign currencies or working capital, or shall not exceed the amount of their net assets in foreign currency; such provisions also apply to non-bank financial institutions. The balance quotas for external guarantees and/or the balance for external guarantees that are approved by the Foreign Exchange Administration on a case-by-case basis shall not exceed 50 per cent of their net assets respectively.

Fourth, clarifying the administrative method for non-financing guarantees provided by banks. When furnishing non-financing external guarantees, the banks are not subject to the provisions on the proportion of net assets and the profitability of the guaranteed party, but either the guaranteed party or the beneficiary shall be the domestic institution or the overseas institution in which the domestic institution holds shares, directly or indirectly.

Finally, abolishing the approval procedures for the banks external guarantee performance and clarifying procedures for the external guarantee performance for other entities. Banks may apply for external guarantee performances at their own discretion. Non-bank financial institutions and enterprises shall apply with the local Foreign Exchange Administrations for approval of external guarantee performances on a case-by-case basis, and such institutions and enterprises may purchase foreign currencies during the application process.

With the streamlined administrative procedures for external guarantees and clarified administrative requirements, the Circular makes it more convenient for domestic institutions to go globaland delivers more efficient domestic credit support to overseas investment companies, thus enabling domestic financial institutions to better control risks. In the meantime, the Circular refines the risk-prevention mechanisms related to the external guarantees and optimizes the regularly-recorded external guarantee statements, thus paving the way for efficient statistical monitoring, risk warnings, as well as a risk-control system for the balance of payments.