Cross-border loan transactions related to the People's Republic of China (PRC) can be complicated due to the interplay between various legal and regulatory regimes, especially when multiple jurisdictions are involved. These complexities often manifest in different structural models, each with their own legal and compliance considerations. Common examples include:

1. Direct lending to PRC-incorporated borrowers
   
   
   
   
   
2. Direct lending to PRC-incorporated borrowers
   
   
   
3. Dual onshore-offshore borrower structures
   
   
   
4. Hybrid syndicates involving both onshore and offshore lenders

In most cases, these offshore borrowers are incorporated in Hong Kong, Singapore or tax-friendly havens like the British Virgin Islands and Cayman Islands.

Understanding Nei Bao Wai Dai

One of the most commonly used financing structures is Nei Bao Wai Dai (NBWD), which directly translates to "onshore guarantee for offshore indebtedness".

NBWD refers to a cross-border arrangement in which a guarantee or security is provided by a PRC-incorporated entity in support of a loan owed by an offshore borrower to an offshore lender. This usually arises when an offshore subsidiary of a PRC-incorporated parent company requires capital but is unable to secure loans from onshore borrowers quickly. To resolve its financing needs, the onshore parent company may pledge assets to an onshore bank, which then issues a letter of guarantee to the offshore lender, enabling the subsidiary to obtain the loan eventually.

NBWD approval procedure

National Development and Reform Commission's prior approval

For medium/long-term foreign debt (i.e. the tenor or overall loan term exceeds one year), prior approval from the National Development and Reform Commission (NDRC) is required. The scope of application is rather broad and includes both direct and indirect foreign debts (e.g. when the borrower is an offshore entity controlled by a Chinese enterprise). This procedure allows the NDRC to examine the terms and criteria before issuing the Examination and Registration Certificate for approval.¹ The application should be made via the Management and Service Network System for Examination and Registration of Foreign Debts of Enterprises online.

Registration with the State Administration of Foreign Exchange

Foreign debt registration with the State Administration of Foreign Exchange (SAFE) is mandatory for NBWD arrangements regardless of the duration of the loan. Key regulatory requirements can be found in the Regulations on Foreign Exchange Administration on Cross-Border Guarantee and Securities² (Regulations), issued on 1 June 2014.

• Timing: For non-bank entities (e.g. a leasing company), registration with SAFE must be completed within 15 working days following the execution of the security document. If there is any subsequent amendment to the terms, the revised document must also be registered within 15 working days from the date of the change.³ Where the guarantors are PRC banks, the data regarding NBWD should be submitted directly to SAFE through the capital account information system.⁴
• Loan purpose: SAFE imposes restrictions on the use of proceeds. The funds should only be used within the debtors' ordinary business scope and shall not be used for arbitrage or speculation purposes. Special approval is also needed in cases of direct or indirect repatriation of funds into the PRC.⁵
• Financial conditions: The guarantor shall examine the debtor's capacity, such as its expected source of repayment and the possibility of performance of the guarantee, and carry out due diligence on compliance with relevant domestic and overseas laws.⁶

Note that PRC individuals are also allowed to act as cross-border guarantors for offshore borrowing by following the same requirements of non-bank institutions,⁷ but it must be noted that spousal consent is usually required if he/she is married.

Required documentation

According to the Operational Guidelines on Foreign Exchange Administration of Cross-Border Guarantees and Security⁸ (the Guidelines), the following standard documents would need to be provided by non-bank applicants:⁹

• A written application for the NBWD registration: The information to be filled out includes, but is not limited to, the company profile, balance of registered and outstanding cross-border guarantees, loan summary and expected repayment source.
• The guarantee contract and the corresponding principal debt contract: In addition to the loan documents, a summary of key terms should be provided in case of lengthy contracts, affixed with the company seal. For any document that is drafted in foreign language, its Chinese translation should also be submitted, likewise affixed with the seal.
• Relevant evidentiary materials: Any additional documents deemed necessary by NDRC or SAFE should be provided, including but not limited to NDRC approval documents and approvals or filings from the commerce authorities related to the overseas investment project.

SAFE will carry out a procedural examination of each application requested by non-bank institutions and assess the authenticity, commercial reasonableness, compliance or performance of the guarantee contract. SAFE also reserves the right to require a written explanation when doubt arises.

Non-registration or late registration without reasonable explanation will be treated as cases of failure. Supplementary registration procedures will only be handled following administrative scrutiny by the Foreign Exchange Inspection Department.¹⁰

Perfection requirements

Depending on the type of assets, perfection of security interests is required to ensure enforceability against third parties and in insolvency proceedings. Perfection typically involves registration with the relevant authority, which serves to give public notice of the security interest and establish priority. Common examples include:

• Mortgage over real estate: Registration with local land authority.
• Mortgage over movables: Registration with the Credit Reference Centre of the People's Bank of China (PBOC)¹¹ (Note that there are other specific registries for vessels, aircrafts and vehicles).¹²
• Equity pledge: Registration with the local Administration of Market Regulation (for private companies) or the China Securities Depository and Clearing Corporation Limited (for listed companies).
• Pledge over receivables: Registration with the Credit Reference Centre of the PBOC.

Note that while mortgage over property is theoretically permissible, requirements such as the need for foreign creditors to have a branch in China are difficult to meet and often place them at a disadvantage.

Corporate authorisation

Subject to PRC laws, corporate authority is required in the event of companies providing a guarantee or security.

Under the company law of the PRC, a company must obtain approval from its board of directors or shareholders' meeting providing a guarantee for any other person, subject to the prescribed limit on the total amount of guarantees listed in its articles of association.¹³

For listed companies, additional requirements apply. Where any guarantee provided within one year exceeds 30% of a listed company's total assets, the matter shall be passed by a special resolution of the shareholders' general meeting. It should be adopted by:

• shareholders representing at least two-thirds of the voting rights in attendance at the meeting; and
• more than two-thirds of the voting rights represented by preferred shareholders.¹⁴

In addition, it is essential for listed companies to make public announcements upon the passing of the corporate resolution.¹⁵

Key takeaways

Arranging NBWD involves multiple layers of regulatory, procedural and practical considerations. Below are some of the key factors highlighted in this article to take into consideration when structuring cross-border guarantees:

• NBWD arrangements would require the NDRC's prior approval for medium- and long-term foreign debt, and SAFE registration is mandatory regardless of loan duration.
• SAFE registration is time-sensitive and demands careful compliance with different documentary requirements, particularly for non-bank institutions.
• Proper perfection of security interests and corporate authorisation are essential prerequisites for establishing a legally sound NBWD structure.
• Practical challenges, such as foreign lender restrictions, spousal consent for individual guarantees and registry-specific procedures, must be carefully navigated to ensure enforceability and regulatory compliance.

Cross-border financing can be complex and requires careful scrutiny. It is therefore recommended to engage qualified PRC lawyers as early as possible in the process to ensure regulatory alignment.

1. Article 10 of the Administrative Measures for the Examination and Registration of Medium and Long-term Foreign Debts of Enterprises
2. The Regulations have been published on SAFE's website and can be accessed at the following link: a17ee20371134380af159a08ea725e77.doc
3. Article 9 of the Regulations
4. Part II, section II(I) of the Guidelines
5. Article 11 of the Regulations
6. Article 12 of the Regulations
7. Part I, section VIII(II) of the Guidelines
8. The Guidelines have been published on SAFE's website and can be accessed at the following link:1927bb02a60048d5a28d1473ef0351e3.doc
9. Part I, section II(II) of the Guidelines
10. Part I, section II(II)(2) of the Guidelines
11. Article 4 of the Decision of the State Council on the Implementation of Unified Registration for Pledge of Movable Property and Rights (Guofa [2020] No.18)
12. Ships should be registered at the local maritime registry; aircraft should be registered at the Civil Aviation Administration of China; vehicles should be registered at the local vehicle registry.
13. Article 15 of the Company Law of the People's Republic of China (Revised in 2023)
14. Article 78 of the Guidelines for Articles of Association of Listed Companies
    (Note: "Preferred shareholders" exclude those with resumed voting rights but include shareholder proxies)
15. Article 91 of the Guidelines for Articles of Association of Listed Companies (Required information to be disclosed can also be found in this Article)