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Do Business in China


The Agency System in Foreign Trade

Foreign trade agency system is also called "import and export agency system." It is a form in which the foreign trade enterprises offer services to domestic commodity suppliers and recipients, that is, representing the productive enterprises and domestic recipients in handling import and export. Foreign trade agency system is an important measure that China has adopted in its foreign trade reform.

For a long time, China had mainly employed the purchasing system in its import and export trade. Since 1979, along with the continuous development of the foreign trade reform, the purchasing system can no longer fit the requirement of the economic development. In 1984, China began to introduce the foreign trade agency system, first making the recipients of imported equipment and goods responsible for their own profits and losses. And in 1988 the foreign trade agency system was fully practiced.

As the foreign trade agency system is not adopted to counter specifically the state monopoly of foreign trade or the foreign trade purchasing system, it existed side by side with other forms of operation as new forms of foreign trade. In August 1991, the Ministry of Foreign Trade and Economic Relations (now the Ministry of Foreign Trade and Economic Cooperation) issued the "Interim Regulations Concerning the Foreign Trade Agency System," and later it issued an interpretation to Article 24 of this document to standardize the foreign trade agency system.

After 1995, the "Ninth Five-Year Plan for National Economic and Social Development and the Long-Term Target Through the Year 2010" stipulated that China's economic restructuring has achieved further progress, and the import and export in foreign trade, which primarily based on purchasing, has lost the objective foundation for existence, and a foreign trade agency system has developed under the guidance of state policies.

Foreign Finance Regulatory Regime of China

International Commercial Loan
International Commercial Loan refers to the loan borrowed from banks or other financial institutions, enterprises, individuals outside China or foreign-funded banks, Chinese-foreign joint venture banks or other foreign-funded, Sino-foreign funded financial institutions in China by domestic institutions who assume the contractual obligations of repayment in foreign currencies.

Domestic Institutions Authorized for External Finance
Financial Institutions running offshore borrowing business, approved by the State Administration of Exchange Control.

Approved industrial and trade enterprises or groups of enterprise.

Procedure for external finance

For these domestic institutions mentioned above, the action of borrowing is valid only when it has been subject to due procedure and has been approved by authorized organs.

Approving Organ
The People's Bank of China is the approving organ for international commercial loan that authorizes the State Administration of Exchange Control and its branches to be in charge of the approval, supervision and administration on International Commercial Loan.

For external borrowing, domestic institutions need to apply to the department of exchange control, and to submit relevant evidential documents required by the department of exchange control, including:

Evidential documents for external borrowing that has been taken into the State Program of foreign investment application;
Approval documents for the establishment of borrowing project, including loan purpose, and the carrying-out of counterpart funding in RMB;
Memorandum on terms of loan, including name of creditor, volume of credit and currency category, interest rate, other fees, grace period, intent on prepayment and other financial terms;
Financial resources for repayment and repayment planning;
Other relevant materials required by the department of exchange control.

Registration of External Debt
After execution of the agreement of international commercial loan, the domestic institution shall go through the formalities for external debt registration, transfer in the borrowed intentional commercial loan, and shall not keep the loan abroad or use it directly in foreign countries without consent from department of exchange control.

Regulations on Enterprise with Foreign Investment
Enterprise with foreign investment can borrow and use international commercial loan directly with registration of the foreign debt with the department of exchange control. Other relevant regulations on Chinese-funded enterprises are not applicable.

External Guarantee

Definition and Content of External Guarantee
External guarantee means that the domestic institution (excluding foreign-funded financial institutions in China) provides the guarantee in form of Letter of Guarantee, Standby L/C, promissory note, bill of exchange and etc. or undertakes to bear the responsibility of repayment to the institutions abroad or foreign-funded financial institutions in China (i.e. creditor or beneficiary) when the debtor fails to repay the debt when. The content of external guarantee includes:
Financing Guarantee;
Financial Leasing Guarantee;
Guarantee under Compensation trade;
Guarantee in offshore project contracting;
Other Guarantee with the nature of external debt.

Regulatory Organ
The State Administration of Exchange Control and its branches, authorized by the People's Bank of China is the regulatory organ for External Guarantee.

Guarantor shall be a financial institution (excluding foreign-funded financial institution) authorized to run external guarantee business or a legal person of non-financial enterprise capable of repaying the debt for the debtor including domestic enterprise and enterprise with foreign investment.

Relevant Requisition for External Guarantee
Guarantors shall not offer external guarantee to losing propositions;
The external guarantee offered by the guarantor must be approved by the Administration of Exchange Control;
After offering external guarantee, the guarantor shall go to the local Administration of Exchange Control to register the guarantee. The foreign currency needed to pay for the fulfillment of the guarantee can be remitted out only when it is approved by local Administration of exchange Control after checking the balance of guarantee and debt;
For offering external guarantee, the guarantor shall make a written contract with creditor and applicant;
The guarantee contract offered by a guarantor without any approval is invalid. The guarantor is to be warned and criticized with a circulated notice, and its qualification for external guarantee is to be suspended or revoked respectively if the guarantor offers an unauthorized external guarantee or the guarantor offers an external guarantee without registration.

This information is designed to provide a summary of aspects of subject matter covered herein and it doesn't purport to be elaborate or to render legal opinion. Please inquire local lawyers if you need further information. Chinese Lawyers advice should also be obtained before applying any contents hereof due to the rapidly variation of Chinese law.


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