Our Analysis of NDRC Regulatory Policy on Foreign Debt Issuance

On 14 September 2015, the National Development and Reform Commission (the “NDRC”) issued the Notice on Promoting Reform of the Administration of the Recordal and Registration System for the Foreign Issuance of Debt by Enterprises (the “Notice”). After the issuance of the Notice, China’s foreign debt administration changed from the approval system to the total quantity control recordal system. During the last few years, the scale of foreign debt has been increasing year on year.

Chinese enterprises currently employ three principal models to issue offshore bonds: (1) direct issuance by a domestic enterprise, namely, a domestic enterprise issue the offshore bonds directly; (2) indirect issuance by a domestic enterprise, namely, an offshore subsidiary of a domestic enterprise issues the bonds, usually with the guarantee or other means of credit enhancement provided by the domestic enterprise; or (3) issuance of offshore bonds by a small red chip enterprise, which is a special type of “foreign debt issuance by a Chinese enterprise”. 

The reason that the foreign issuance of debt by a small chip enterprise is a special type of “foreign debt issuance by a Chinese enterprise” is that, from the perspective of the literal meaning of the words, the entities that the Notice regulates are “domestic enterprises and the offshore enterprises or branches controlled by them”. Accordingly, when the Notice was initially issued, those in the industry generally did not consider the foreign issuance of debt by small red chip enterprises falling within the scope of the Notice’s regulation.

However, soon after the issuance of the Notice, it was learnt that the NDRC held a different view regarding the “foreign debt issuance by a Chinese enterprise”, which was that the NDRC required the “foreign debt issuance by a Chinese enterprise” to complete the pre-issuance filing with the NDRC in accordance with the Notice. As there was never any clear basis for expanding the explanatory criteria, certain small red chips with a willingness to take a chance offered offshore bonds without completing the pre-issuance filing with the NDRC. This continued until June 2017 when the Risk Warnings for the Offshore Offering of Foreign Bonds by Enterprises issued by the NDRC chimed the hour, naming five relevant enterprises (which included small red chip enterprises) for failing to carry out prior recordal/registration before issuing foreign debt, and warned that the enterprises shall complete the pre-issuance filing with the NDRC, and after the issuance, they were also required to timely submit issuance information.

In May, 2018, the Department of Foreign Capital and Overseas Investment of the NDRC also called eight issuers of foreign debt and such intermediary firms as underwriters, law firms, etc. in for talks and published the details thereof on its official website, pointing out the violations of regulations committed by the enterprises in their foreign issuance of debt and demanding that the enterprises and intermediary firms comply with the prior recordal/registration requirements of the Notice and regulations on the foreign issuance of debt. It stated that it would more stringently hold relevant enterprises and intermediary firms that fail to carry out the prior recordal/registration procedures or commit other violations of regulations accountable in subsequent foreign issuance of debt and, depending on the seriousness thereof, would place them on the blacklist for the relevant sector and add them to the national trustworthiness information sharing platform, promptly circulate the same publicly and restrict the relevant responsible entities from applying for a new or participating in foreign debt recordal/registration.

From the 2017 criticism by name to the talks in 2018, the NDRC’s attitude toward the foreign issuance of debt by small red chip enterprises progressively became clearer, i.e. small red chip enterprises needed to be incorporated into the scope of regulation of the Notice.

However, the term “small red chip enterprise” is not strictly and clearly defined in law, pursuant to the Notice of the General Office of the State Council Forwarding the Several Opinions of the China Securities Regulatory Commission on Launching a Pilot Project for the Domestic Offering of Stocks and Depository Receipts by Innovative Enterprises, the term “red chip enterprise” means an enterprise that is registered abroad but whose main business activities are carried on in China. In practice, it is generally agreed that “small red chip enterprise” refers to an enterprise that is registered abroad, whose main business activities are carried on in China and whose actual controller is a domestic natural person (including domestic natural persons who subsequently immigrate abroad). 

In past projects, intermediary firms could arrive at different criteria when determining whether the enterprise shall complete the pre-issuance filing with the NDRC based on their own experience and their communications with the regulators: 

1. Criterion of main place of business activities. If an enterprise’s main place of business activities is located outside of China (with the common understanding that its offshore assets and revenues account for at least 50 percent), then the carrying out of pre-issuance filing with the NDRC is not required, even if the actual controller is a domestic natural person. 

2. Criterion of the status of the actual controller. If the actual controller has foreign status and such status was not acquired for the purpose of listing, a “small red chip enterprise” is not constituted and pre-issuance filing with the NDRC is generally not required. Additionally, there are certain other separate situations, e.g. the enterprise is a small red chip enterprise at the time of listing, but the enterprise no longer has an actual controller or there has been a change in the actual controller. 

According to the NDRC’s Regulatory ideas, the NDRC might consider comprehensively whether the business revenue, the payment source of the debt and the business operation entities are in China when determining the requirement of pre-issuance filing with the NDRC. Under the current situation where regulation is growing increasingly strict, and until the NDRC or a relevant authority issues further relevant explanatory criteria for “offshore enterprise controlled by a domestic enterprise” or “small red chip enterprise”, if an enterprise is uncertain as to whether it is required to carry out prior recordal in accordance with state regulations, we would recommend that the opinion of the development and reform commission first be sought and that the enterprise not simply just take a chance. In the subsequent debt issuance project, the intermediary firms must also be more prudent as to whether pre-issuance filing with the NDRC is required for such project.