Jan. 2007 – China View

BEIJING, Jan. 13 (Xinhua) — The Export and Import Bank of China (Eximbank), one of China’s three policy banks, reported that its ratio of non-performing loans dropped to 3.47 percent at the end of 2006.

Information from the bank’s annual working meeting held this week shows that the bank has seen a steady fall in the amount and ratio of non-performing loans (NPL) for eight years in a row since1998, with the NPL ratio down by more than 10 percent from the 14.19 percent in 1998.

In 2006, the bank granted loans of 131.5 billion yuan (about 16.86 billion U.S. dollars), up 11 percent on the previous year. By the end of 2006, the bank’s outstanding loans reached 231.7 billion yuan, while the outstanding amount of foreign government loans handled by the bank was 17.6 billion U.S. dollars.

Eximbank president Li Ruogu said the bank will move away from solely relying on government subsidies to develop commercial business in addition to policy business, and introduce modern banking operation mechanisms.

He said the bank will actively support the state’s economic diplomacy, speed up financial innovation, support the export of services, and help promote export-oriented innovation bases and overseas economic and trade cooperative zones.

Editor: Yan Liang

AFX News posted by FORBES.com

BEIJING (XFN-ASIA) – China’s reliance on credit and investment to fuel economic growth runs the risk of pushing up inflation and creating more non-performing loans in the banking system, International Monetary Fund managing director Rodrigo de Rato said.

‘Rapid growth of credit and high levels of investment are a risk for the Chinese economy and could materialize to inflation but also ineffective investment,’ he said at a press conference in Beijing.

The IMF official said the need to sterilize large inflows of capital are limiting the use of monetary policy in China.

‘If monetary policy has to take a heavy tool in sterilizing large inflows into the economy, the capacity to use monetary policy to do other things diminishes,’ he said.

And he said the IMF thinks monetary policy, effectively used, would be better than the administrative measures now used by authorities to limit investment and credit growth.

‘We think administrative measures, window policies, are not appropriate measures to limit or reduce the strength of investment.’

Greater flexibility in its foreign exchange policy would give China more choices when it comes to monetary policy, de Rato said.

‘A more flexible exchange rate would allow for the fuller play of monetary policy. The need for monetary policy to play a more important role, we see that as key,’ he said.

De Rato said the success of China’s currency policy should not be judged solely against the dollar but against the currencies of all its trading partners.

‘The effective exchange rate is a key question to judge what is the appropriate path’ of the yuan.

De Rato added that the IMF does not see any need to panic over the current state of inflation in China.

‘We don’t see a short-term risk of inflation. We don’t see inflationary pressure this year,’ he said.

CPI growth jumped to 2.8 pct in December from November’s 1.9 pct but food prices make up a third of the basket used to measure CPI and analysts have pointed out that surging grain prices played a major part in the CPI growth.

Nov. 2006 – Morrison / Foerster

The new Enterprise Bankruptcy Law of the People’s Republic of China (“PRC”) (中华人民共和国企业破产法) (the “Bankruptcy Law”) was adopted on August 27, 2006 and will take effect on June 1, 2007, superseding the 1986-enacted Enterprise Bankruptcy Law (Trial) (中华人民共和国企业破产法(试行)) (the “1986 Law”), governing the bankruptcy of State-owned Enterprises (“SOEs”). The Bankruptcy Law offers for the first time a unified regime applicable to all types of enterprises in China and also provides a more robust and detailed regime for enforcement of creditors’ claims. We discuss below some highlights of the Bankruptcy Law:

Scope of the New Law

The 1986 Law only applies to the bankruptcy of SOEs, while the Bankruptcy Law provides a unified bankruptcy system for all “enterprises with legal person status,” covering both SOEs and privately-owed companies, including foreign investment enterprises (“FIEs”). Individual or partnership bankruptcy, however, is not covered by the Bankruptcy Law.

Cross-Border Insolvency

The Bankruptcy Law for the first time incorporates specific provisions governing the administration of cross-border bankruptcies.

In relation to “outbound” insolvency cases involving the overseas assets of a PRC debtor, Article 5 states: “The validity of any bankruptcy proceedings commenced in accordance with this Law shall extend to the properties of the debtor outside of the PRC.” China has not adopted the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (“UNCITRAL Model Law”), which provides a framework for cooperation with foreign courts on cross-border insolvency proceedings. The U.S., the U.K., and other countries that have adopted the UNCITRAL Model Law will nonetheless accept “foreign representatives” from China operating under Article 5 and pursuing assets in those countries as part of China bankruptcy proceedings where they can establish that China is the “center of main interests” of the debtor. Because the UNCITRAL Model Law does not condition any benefits on reciprocity, the U.S. and other Model Law countries will confer substantial “recognition” and cooperation for China representatives, even though there is less reciprocal benefit to the U.S. or other foreign players in China. The new U.S. Chapter 15 is a powerful tool for China “foreign representatives” to arrange for the transfer of U.S. assets and creditors to the China insolvency proceedings. U.S. creditors, on the other hand, worry that their recoveries from U.S. assets of China debtors will decrease once those assets become administered and redistributed in China under China proceedings governed by the Bankruptcy Law.

Article 5 also permits “inbound” cases, where a foreign representative from another country seeks recognition of a foreign court ruling in China, provided that the following conditions are satisfied:

There are relevant treaties or reciprocal relations between such country and the PRC;

The bankruptcy proceedings outside the PRC do not violate the State sovereignty, national security and social public interest of the PRC; and

The bankruptcy proceedings outside the PRC do not harm the lawful rights and interests of the creditors in the PRC.

These conditions are quite onerous, and the court has substantial discretion to interpret the conditions and decide whether they have been satisfied before permitting the recognition of a foreign court ruling. Nonetheless, the Bankruptcy Law is a step forward moving towards the adoption of international standards in the area of cross-border insolvency. Moreover, at least in countries adopting the UNCITRAL Model Law (e.g., the U.S. Chapter 15), China now can credibly seek to resolve the assets and liabilities of Chinese entities wherever located.

Grounds for Bankruptcy Petitions

The 1986 Law allows a creditor to file a bankruptcy petition only when the debtor is unable generally to pay its debts as they fall due. Under the Bankruptcy Law, both the debtor and its creditors are allowed to file reorganization or bankruptcy petitions to the People’s Court in the following circumstances (subject to special rules for financial institutions):

* A creditor may apply to the court for reorganization or bankruptcy of a debtor, if the debtor is unable to pay its debts as they fall due (cash-flow insolvency).
* A debtor may apply to the court for reorganization, conciliation or bankruptcy, if it is unable to pay its debts as they fall due, or if its assets are insufficient to pay off all debts (balance-sheet insolvency), or if it is obviously insolvent.

The Bankruptcy Law has expanded the grounds for bankruptcy petitions and has also introduced corporate reorganization and conciliation as mechanisms to revive an insolvent company.

Corporate Reorganization (重整)

Under the 1986 Law, a corporate reorganization (整顿) can only be petitioned for and carried out by the government authorities. The Bankruptcy Law, however, allows either the debtor or the creditor to apply to the People’s Court for reorganization of the debtor. When a creditor petitions to bankrupt a debtor, the debtor, or its investors holding more than one third of the debtor’s registered capital, may apply to the court for reorganization after the court has accepted the bankruptcy petition, but before the debtor is declared bankrupt.

The debtor or administrator must submit a draft reorganization plan to the court within six months (or nine months with court approval) of the court’s ruling for reorganization. The draft reorganization plan must be approved by a majority of the number of creditors in each voting group, representing at least two-thirds of the total amount of confirmed claims in a class and a majority of the creditors in a class present at the creditor’s meeting. All creditors who have declared a claim are allowed to vote on a draft plan, except that secured creditors may not vote on a plan to sell the business or distribute assets, unless they give up their security interests.

The creditors approving the draft reorganization plan are classified into the following groups: (i) creditors with secured claim over specific properties of the debtor, (ii) employees with claims on salaries and social insurance premium, (iii) agencies with claims on outstanding taxes, and (iv) ordinary creditors. When the draft reorganization plan is not approved by all of the voting groups, the debtor or the administrator can still apply to court for approval, if the reorganization plan satisfies certain conditions. If reorganization plan is not approved or the debtor does not implement the reorganization plan, the court may declare the debtor bankrupt.

Conciliation (和解)

A debtor may apply to the People’s Court for conciliation of its debt after the court accepts the bankruptcy application. If the court approves the conciliation application, it will make a public announcement and convene a creditors’ meeting to discuss the draft conciliation plan. Once the reconciliation is approved by the creditors’ meeting and the court, the administrator shall transfer the business and assets to the debtor. To become effective, the plan must be approved by more than half of creditors present at the meeting holding more than two-thirds of the total amount of confirmed claims (excluding secured claims). If the conciliation plan is rejected, the court will declare the debtor bankrupt.

Administrator (管理人)

The 1986 Law authorizes a “liquidation committee” (consisting of government officials and debtor’s management) to take control of the assets of the debtor. To address creditors’ concerns about transparency and independence of the liquidation committee, the Bankruptcy Law has introduced the role of an administrator to manage the assets and operations of the debtor as well as other legal proceedings. The administrator, who is appointed by the People’s Court, must meet the qualifications stipulated in the Bankruptcy Law. Law firms, accounting firms and bankruptcy liquidation firms or professionals from such firms are among those eligible to serve.

Administrators are required to exercise duties of loyalty and of diligence and are liable for any losses caused to the debtor’s properties that result from a breach of those duties. Professional liability insurance is required for individual administrators.

Priorities of Claims

After the debtor is declared bankrupt, all of its assets must be sold by auction, unless otherwise determined by the creditor’s meeting. The bankrupt assets can be sold as a whole or in part. This assumes that any reorganization or conciliation has failed.

The Bankruptcy Law stipulates a scheme for claim payment priority. Unlike the 1986 Law, the Bankruptcy Law no longer gives higher priority to unpaid employee wages and social insurance premiums. Under Article 109, secured creditors have payment priority to the extent of the value of the secured properties, while the undersecured portion is treated as a common claim. Payment of claims in a liquidation must be made according to the following order:

(i) bankruptcy expenses and joint interest debts;

(ii) unpaid employees’ salaries and basic social insurance premiums;

(iii) outstanding tax; and

(iv) ordinary unsecured credits.

Conclusion
Until the enactment of the Bankruptcy Law, China did not have a unified bankruptcy law applicable to all enterprises. Historically bankruptcies of SOEs have often been driven by public policy concerns more than the interests of creditors out of concerns for large unemployment and social instability. Bankruptcies of other types of entities have been subject to relatively vague and general bankruptcy provisions of the Law of Civil Procedure and of Supreme Court interpretations. The Bankruptcy Law, with its detailed provisions governing a broad range of enterprise debtors, will bring sweeping changes to the administration of creditrs’ claims in the PRC. More streamlined procedures will help enhance the transparency of bankruptcy proceedings. New rules, including those providing for bankruptcy petitions, role of administrators, corporate reorganization, conciliation, role of creditors and priorities of claims, will bring China’s enterprise bankruptcies closer to international standards.

Nov. 2006 – Morrison / Foerster

On the heels of promulgation of the Opinion on Regulating the Entry into and the Administration of Foreign Investment in the Real Estate Market (“Opinion 171”) (关于规范房地产市场外资准入和管理的意见) (Jian Zhu Fang [2006] No. 171), the State Administration of Foreign Exchange (“SAFE”) and the Ministry of Construction jointly issued the Circular Concerning Certain Issues Regarding Regulation of Foreign Exchange Management in the Real Estate Market (“Foreign Exchange Circular”) (国家外汇管理局、建设部关于规范房地产市场外汇管理有关问题的通知; Hui Fa [2006] No. 47) on September 1, 2006.

The Foreign Exchange Circular sets out specific measures guiding SAFE branches in their administration of Opinion 171 through their role of monitoring and supervising foreign exchange transactions. The key points of the Foreign Exchange Circular include the following:

* Foreign exchange remitted into China for the purchase of commodity premises by a foreign company’s branch or representative office must be converted into Renminbi and directly wired to the real estate developer’s Renminbi account.
* If the purchase is not completed for any reason, foreign currency may be purchased with the Renminbi purchase funds and refunded to the payor by outbound remittance.
* If a foreign company’s branch or representative office or a foreign individual sells commodity premises, the Renminbi sales proceeds may be used to purchase foreign currency, which can be remitted out of China.
* Reflecting principles of Opinion 171, the Foreign Exchange Circular states that the relevant SAFE branch will not register the foreign debt of a foreign-invested real estate enterprise (“FIREE”) or confirm settlement of foreign exchange loan proceeds if (a) the enterprise’s registered capital has not been fully paid up, (b) it has not yet obtained a “land use certificate” for the land, or (c) the paid-in capital of the development project is less than 35% of the total investment of the project.
* If a foreign company or individual acquires a domestic real estate enterprise or a Chinese party’s interest in an FIREE but fails to pay the purchase price in a lump sum, the relevant SAFE branch should not process related foreign exchange registrations. Where the documentation related to an FIREE provides for any form of fixed return for any party, likewise the relevant SAFE branch must not process any foreign exchange registration or amendment thereof for the FIREE.

Nov. 2006 – Morrison / Foerster

The Supreme People’s Court of China (“SPC”), the highest judicial authority in China, has issued a comprehensive interpretation, Interpretation of Issues Relating to the Application of the PRC Arbitration Law (最高人民法院关于适用中华人民共和国仲裁法若干问题的解释) Fa Shi [2006] No. 7, on the application of the PRC Arbitration Law (“Interpretation No. 7”), effective September 8, 2006.

Background

In the context of a cross-border commercial transaction, China does not recognize and enforce a foreign court judgment in China unless China and the relevant foreign jurisdiction are both parties to a bilateral or multilateral judicial treaty. So far only a handful of countries have such treaties with China. However, China does recognize and enforce foreign arbitral awards rendered in countries that are members of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958) (“New York Convention”). Therefore, in practice, arbitration has almost become a default choice for dispute resolution in cross-border commercial transactions with China.

Following a style of legislation drafting that is common in China, the Arbitration Law is drafted in general terms. At the same time, case law does not have the binding status under Chinese law that it does under common law systems. As such, a formal interpretation such as Interpretation No. 7 is very significant.

Highlights

Interpretation No. 7 is applicable to both domestic and foreign-related arbitrations unless the specific provisions provide otherwise. Compared with SPC’s prior interpretations concerning arbitration, Interpretation No. 7 is comprehensive in scope, addressing many issues arising in connection with arbitration agreements, court review of arbitral awards, and enforcement of arbitral awards, and will override prior interpretations in case of conflict. We highlight some points as follows.

* According to Interpretation No. 7, an arbitration agreement may take any written form such as electronic data including telegraph, telefax, facsimile, electronic data exchange, and email.
* When the parties to a contract generally agree to submit contractual disputes to arbitration, the matters subject to arbitration may include all disputes concerning the execution, validity, amendment, assignment, performance, liability, interpretation, and termination of the contract.
* Interpretation No. 7 clarifies the validity of an arbitration agreement in various situations, for example,
* If the arbitration agreement itself has a defect:
o PRC law generally requires the designation of an arbitration commission to administer arbitrations. Ad hoc arbitrations in China are not recognized. Under Interpretation No. 7, if the arbitration agreement designates an inaccurate name for the arbitration institution, the name of the institution will be ascertained from the context so that the validity of the clause is preserved. Similarly, if the arbitration agreement provides only the arbitration rules without stipulating the institution, and the intended institution can be ascertained from the agreed arbitration rules or the parties can reach supplemental agreement on the institution, the clause will be upheld;
o If two or more arbitration institutions are designated, the parties may reach agreement to select one institution for arbitration. But if the parties fail to reach agreement on the selection of the institution, the arbitration agreement will be invalid; or
o If the arbitration provisions provide for resolution by either arbitration or the court at the choice of a party, the arbitration clause will be valid unless the party not commencing arbitration objects promptly to the arbitration;
o When one of the parties undergoes a merger or corporate division or dies, the arbitration agreement should be binding on the successor unless there is an agreement to the contrary that was reached when the parties concluded the arbitration agreement;
o When there are some changes to a contract, such as an assignment of the rights and obligations, the arbitration agreement should be binding on the assignee unless the parties have agreed otherwise or the assignee has explicitly raised objections or does not know there is such a separate arbitration agreement. If the contract did not come into effect or was repudiated, the arbitration agreement nonetheless remains effective.
* Interpretation No. 7 provides that an arbitral award may be partially revoked if the portion in question exceeds the scope of arbitration provided in the arbitration agreement, unless that portion is inseparable from the other matters that were arbitrated. Therefore, an entire award cannot be set aside if only a portion of the award exceeds the scope of arbitration, unless that portion is inseparable.
* If a party has not objected to the validity of an arbitration agreement during the arbitration, after an arbitral award is rendered a court should not accept that party’s application to revoke the award or objection to enforcement of the award if the party’s application or defense is based on the argument that the arbitration agreement is invalid. Furthermore, if, as permitted under PRC law, the issue of the validity of the arbitration agreement has been submitted to an arbitration commission for determination, a PRC court will not overturn such a determination.
* In connection with the judicial review of the validity of a foreign-related arbitration agreement, Interpretation No. 7 specifically provides that the applicable law should be the law agreed on by the parties. However, if the parties have not agreed on the law applicable to the arbitration agreement, the law of the place of arbitration should be applied. If there is no agreed applicable law and no agreed place of arbitration, the law of the place of the court will be applicable. This provision makes it clear that parties to a cross-border transaction may opt out of the application of PRC law.

Sept. 2006 – Morrison / Foerster

Clarifying New Registration and Approval Regulations – SAIC’s Circular 81

The Circular for the Application of Laws and Regulations concerning the Approval and Registration of Foreign Invested Companies, Circular Gongshangwaiqizi [2006] No. 81, (《关于外商投资的公司审批登记管理法律适用若干问题的执行意见》; “Circular 81”) was jointly issued by the State Administration for Industry and Commerce (“SAIC”), Ministry of Commerce, General Administration of Customs, and State Administration of Foreign Exchange on May 10, 2006. SAIC also issued a press release and a notice to clarify several issues regarding the implementation of Circular 81 on May 10, 2006, and June 1, 2006, respectively.

Circular 81 was issued to clarify inconsistencies between the new Administrative Rules for Company Registration (《公司登记管理条例》) (“Registration Rules”) and the recently revised Company Law. These inconsistencies affected the approval and registration of foreign invested enterprises (“FIEs”), and created uncertainty on the part of many foreign investors. A number of significant changes are summarized as follows:

FIE Establishment

* Applications to establish FIEs now require additional documents, including:

(i) original attestation documents from foreign notarization authorities and the relevant Chinese Embassy attesting to the identities of the foreign investors, and

(ii) a Power of Attorney on Delivery of Legal Documents (法律文件送达授权委托书) entered into between the foreign investors and their authorized local agent.

* Wholly Foreign-Owned Enterprises (“WFOEs”) and Contractual Joint Ventures are required to register with the local bureau of the SAIC within 30 days of issuance of their Certificate of Approval, while Equity Joint Ventures are required to register within 90 days. Failure to register within the stipulated time frame will require the foreign investor to obtain written confirmation from the approval authorities that the approval is still valid, or else to re-apply for approval.
* The registered capital of an FIE must consist of at least 30% cash, while contributions in-kind and contributions of intangible property may represent no more than 70% of the registered capital.
* If a foreign investor has obtained a loan, those funds will be considered “self-owned” funds of that investor and can be used as capital contributions to an FIE.
* The first installment of an FIE’s registered capital must be at least 15% of the total registered capital and must be injected within three months of issuance of the FIE’s business license. The remainder of the registered capital must be injected within two years of issuance of the business license.
* If a WFOE is established by a single foreign natural person, the registered capital shall be no less than RMB 100,000 and must be contributed in full within six months of issuance of the business license. Such a WFOE would not be permitted to establish a subsidiary in China.

Increasing Registered Capital of an FIE

* When an FIE’s application to increase its registered capital is approved, it can immediately apply to update its foreign exchange registration certificate and foreign exchange capital account without waiting for issuance of the new business license. Once at least 20% of the increased registered capital has been paid-in, the FIE can renew its business license.

Branches and Liaison Offices

* When an FIE applies to establish a branch, it now does not need to obtain a “transmission letter” (核转函) from the local AIC; rather, it will apply directly to the AIC where the branch will be located.
* Upon the establishment or cancellation of a branch, an FIE shall file for the record (备案) such change with the AIC where the FIE’s head office is registered.
* When an FIE establishes a liaison office, it does not need to register such liaison office with the AIC.
* An existing liaison office must either be de-registered or converted to branches when its existing registration certificate expires. After deregistration of an existing liaison office, it is permitted to continue operating and will be monitored by the local AIC. According to the SAIC, a deregistered liaison office may open a special bank account solely to receive operating funds from its parent FIE, but is not permitted to use that bank account for business activities.
* Liaison offices are only permitted to engage in liaison-related activities and cannot engage in direct business activities.