China’s New Syndicated Loan Measures - what offshore lenders need to know

1. Background of enactment

The PRC Syndicated Loan Measures replaced the Syndicated Loan Business Guidelines, which were revised and issued in 2011 by the China Banking Regulatory Commission (one of the predecessors of the NFRA) (Yinjianfa [2011] 85) (the “PRC Syndicated Loan Guidelines”). The changes are intended to improve the management and regulation of syndicated loan business in the PRC. The “upgrading” of the “guidelines” to “measures”, and the new provisions on regulatory powers and administrative penalties in the PRC Syndicated Loan Measures indicate stronger regulation of syndicated loan business by the NRFA.

2. Who are in-scope lenders?

The PRC Syndicated Loan Measures regulate the syndicated loan business of “banking financial institutions set up and operating loan business in the PRC” (“In-scope Lenders”).

There are a few salient points to note:

“loan business” covers onshore as well as cross-border loan business (for example, outbound lending by domestic banks under PBOC 27[2])
“set up in the PRC”. The NFRA regulates all banks operating in the PRC. Therefore, “set up in the PRC” not only covers domestic banks incorporated in the PRC, but also foreign-owned locally-incorporated banks, as well as onshore branches of foreign banks.

In this article, “Onshore” or “PRC” means the People’s Republic of China, excluding Hong Kong and Macau Special Administrative Regions and Taiwan; and “Offshore” means any jurisdiction other than “Onshore”.

The Notice on Offshore Lending Business of Banking Financial Institutions (Yinfa [2022] No. 27) (“PBOC 27”) jointly issued by the People’s Bank of China and the State Administration of Foreign Exchange. See our article “PBOC Notice 27 on Offshore Lending by PRC Banks” for further details: https://www.kwm.com/hk/en/insights/latest-thinking/notice-on-offshore-lending-business-of-banking-financial-institutions.html

Subject to relevant PRC laws and regulations. Please see further Section 5 below.

Please refer to our articles (in Chinese only):
https://www.kwm.com/cn/zh/insights/latest-thinking/key-takeaways-of-measures-for-the-administration-of-syndicated-loan-business-draft-for-comments.html
https://www.kwm.com/cn/zh/insights/latest-thinking/7-faqs-on-draft-measures-for-the-administration-of-syndicated-loan-business.html
https://www.kwm.com/cn/zh/insights/latest-thinking/key-takeaways-of-china-s-revised-rules-on-syndicated-loan.html
https://mp.weixin.qq.com/s/j4TxML6XjuDc-cV2GOTaew

《The Notice relating to further regulating the transfer of credit assets by banking financial institutions》[Yinjianfa [2010] 102]

Please refer to the below link for the full text (in Chinese only): https://www.yindeng.com.cn/Home/fggf/cn/glbm/20241031/2196401.shtml.

Chinese-funded banks incorporated in the PRC and lending through offshore banking units are not clearly excluded from the PRC Syndicated Loan Measures and it is not clear whether they are In-scope Lenders

The PRC Syndicated Loan Measures also apply to non-banking financial institutions set up in the PRC engaged in syndicated loans. However, rural banks are not permitted to engage in syndicated lending. Rural commercial banks, rural co-operative banks and rural credit companies are to be separately regulated by the relevant banking regulator of the State Council of the PRC

3. How are offshore lenders affected?

In Section 2 above, we have seen that offshore lenders (including foreign-funded banks operating outside the PRC and offshore branches of Chinese-funded banks) are not In-scope Lenders regulated by the PRC Syndicated Loan Measures. How might the PRC Syndicated Loan Measures affect those offshore lenders?

We illustrate the potential transactions involving offshore lenders that may be affected by the PRC Syndicated Loan Measures in the following diagrams:

The PRC Syndicated Loan Measures do not apply to syndicated loans where the arrangers, lenders, agents and borrowers are all located offshore.

Diagram 1:

Where the syndicated loan involves arrangers, lenders and agents that are all located offshore, and the borrowers are all located onshore, the PRC Syndicated Loan Measures do not apply.

Diagram 2:

Where the syndicated loan involves offshore lenders as well as one or more In-scope Lenders, the impact of the PRC Syndicated Loan Measures on the offshore lenders in such a transaction depends on the role of such In-Scope Lenders:

o Where an In-scope Lender acts as a participating lender in the syndicate

By way of example:

Diagram 3:

In this scenario, an In-scope Lender acting as a lender must comply with the relevant requirements under the PRC Syndicated Loan Measures, including giving the other lenders (including offshore lenders) the first right of refusal if it wishes to transfer its participation in a loan[3] (see “Syndicated loan transfer” under Section 4 below), the requirements relating to the charging of fees (see “Charging of fees” under Section 4 below), and the requirement to register any transfer (see “Registration of transfer” under Section 4 below).

o Where an In-scope Lender acts as an agent for the syndicate

By way of example:

Diagram 4:

In this scenario, the In-scope Lender acting as an agent must comply with requirements relating to the appointment of agents under the PRC Syndicated Loan Measures (see “Appointment of agents” under Section 4 below) and the charging of fees (see “Charging of fees” under Section 4 below).

o Where an In-scope Lender acts as an arranger (which will usually involve other In-scope Lenders acting as an agent or lender)

By way of example:

Diagram 5:

In this scenario, the In-scope Lender acting as arranger must comply with relevant requirements under the PRC Syndicated Loan Measures, including with respect to minimum commitment and distribution ratios (see “Minimum commitment and distribution ratios” under Section 4 below), tranching (see “Tranching” under Section 4 below) and the charging of fees (see “Charging of fees” under Section 4 below) (while In-scope Lenders acting as agent or lender must comply with the relevant requirements under the PRC Syndicated Loan Measures as mentioned above).

There will be scenarios featuring different combinations of the above roles undertaken by one or more In-scope Lenders and so the relevant requirements of the PRC Syndicated Loan Measures would apply to those In-scope Lenders accordingly. Offshore lenders in the syndicate, though not directly subject to the PRC syndicated Loan Measures, would be indirectly affected by the PRC Syndicated Loan Measures because the In-scope Lenders would still be subject to the relevant requirements as set out above. From an offshore lender’s perspective, the impact could be restrictive (for example, due to tranching requirements) or beneficial (for example, because In-scope Lenders that are participating lenders must give the rest of the syndicate (including offshore lenders) the first right of refusal).

4. Key changes from the Syndicated Loan Guidelines

For a detailed analysis of the PRC Syndicated Loan Measures, please refer to our recent articles[4]. We set out in the table below the key terms in the PRC Syndicated Loan Measures which may be relevant to offshore lenders, including a comparison with the PRC Syndicated Loan Guidelines.

5. Key areas to watch

The promulgation of the PRC Syndicated Loan Measures is an important milestone in the development of the syndicated loan market in the PRC. We set out below some key areas to watch for offshore lenders with respect to the development of the cross-border syndicated loan market.

If you have any questions or comments, please get into touch with your KWM contacts.