Legal Issues on External Guarantees by Exclusively Foreign-owned Enterprises

In nowadays business practices, that exclusively foreign-owned enterprises provide guarantees to foreign institutions happens all the time. The author briefly introduces and analyses these kinds of legal issues in this paper.
1. The main legal documents involved in the external guarantees by exclusively foreign-owned enterprises
1). The Guarantee Law of the People's Republic of China
2). Judicial Interpretation of the Supreme People’s Court on Some Issues Regarding the Application of Security Law of the People's Republic of China
3). Regulation of the People's Republic of China on Foreign Exchange Administration
4). Procedures for the Administration of Guarantees Overseas By Institutions within the Chinese Territory
5). Detailed Rules for the Implementation of the Administrative Measures for the Provision of Foreign Guarantees by Domestic Institutions
6). Law of the People's Republic of China on Foreign-funded Enterprises
7). Rules for the Implementation of the Law of the People's Republic of China on Foreign-funded Enterprises
8). Official Reply of the Ministry of Foreign Trade and Economic Cooperation on concerning Issues of Foreign-capital Enterprise Mortgaging its Property or Rights and Interests to Others
9). Written Reply of the State Administration of Foreign Exchange on Issues concerning Providing External Guarantee
10). Letter of the State Administration of Foreign Exchange on explaining the Relevant Provisions on External Guarantees Provided by Domestic Institutions
2. The relevant legal concepts of external guarantee
1). Guarantees made overseas: according to Article 2 of Procedures for the Administration of Guarantees Overseas by Institutions within the Chinese Territory, are guarantees in the forms of guarantee letters, stand-by letters of credit, cashiers' checks and drafts, to institutions outside China or financial institutions with foreign investment inside China with the pledges that when the guaranteed fail to repay the debts in line with the contracts, the guarantors shall perform the obligation of repayment.
2). The variety of external guarantee
Such guarantees include: financial guarantee; financial leasing guarantees; performance guarantee under the compensation trade; debt guarantee in external contracting projects; and guarantee in others forms.
3). The modes of external guarantee
External guarantee are generally divided into one of three categories: guaranty, mortgage and pledge. Guarantors shall not provide such guarantees in the form of lien or deposits.
3. Some legal issues when exclusively foreign-owned enterprises provide guarantees to foreign institutions
1). Whether the guaranteed are qualified or not. In accordance with Article 6 of Detailed Rules for the Implementation of the Administrative Measures for the Provision of Foreign Guarantees by Domestic Institutions, the guaranteed of external guarantee can be divided into the following four categories: domestic enterprises within the People's Republic of China, foreign investment enterprises, those wholly-owned subsidiaries of organizations within the People's Republic of China that have been registered outside the People's Republic of China, and enterprises in which Chinese parties have equity participation. So the guaranteed can not be foreign institutions, which is why when the guaranteed is foreign institution the guarantee shall be rejected by administration of foreign exchange. However, according to Article 47 of Detailed Rules for the Implementation of the Administrative Measures for the Provision of Foreign Guarantees by Domestic Institutions, in the context of counter-security provided to foreign parties, security provided by a Security Provider to a creditor within the People's Republic of China for an organization outside the People's Republic of China, and security provided by a Security Provider for the obtaining of financing by an organization outside the People's Republic of China from a financial institution within the People's Republic of China that is engaged in off-shore banking business, the guaranteed could be foreign institution.
2). Specific regulations. External guarantee involves many foregoing laws and rules. Firstly, involving guarantee, hence it shall conform to the provisions of The Guarantee Law of the People's Republic of China and Judicial Interpretation of the Supreme People's Court on Some Issues Regarding the Application of Security Law of the People’s Republic of China. Secondly, because of involving external guarantee, it shall conform to the regulations of foreign currencies. In accordance with the related provisions of Procedures for the Administration of Guarantees Overseas By Institutions within the Chinese Territory and Detailed Rules for the Implementation of the Administrative Measures for the Provision of Foreign Guarantees by Domestic Institutions, exclusively foreign-owned enterprises may provide security to foreign parties on their own authority without approval by the Administration of Foreign Exchange, but must carry out procedures for registration of the guarantee with the Administration of Foreign Exchange. Procedures for the Administration of Guarantees Overseas by Institutions within the Chinese Territory made a few restrictive provisions to exclusively foreign-owned enterprises providing guarantees to others at the same time, that is: exclusively foreign-owned enterprises shall not provide guarantee for enterprises running under deficit; shall not provide guarantees for registered capital of enterprises with foreign investment; the balance of guarantees made overseas provided by a non-financial institution legal person cannot exceed 50% of its net assets or its foreign revenue in the preceding year. Thirdly, external guarantees by exclusively foreign-owned enterprises also touch upon the norms and restraints of Law of the People's Republic of China on Foreign-funded Enterprises and Rules for the Implementation of the Law of the People's Republic of China on Foreign-funded Enterprises. According to the provisions of Rules for the Implementation of the Law of the People's Republic of China on Foreign-funded Enterprises, where any foreign-funded enterprise intends to mortgage or assign its assets or right and interests to a third party, the case shall be submitted to the examining and approving authority for approval, and then to the administrative department for industry and commerce for record. This provision constitutes prefix examination and approval and the demands of record on the external guarantees. Besides, according to Official reply of the Ministry of Foreign Trade and Economic Cooperation on concerning Issues of Foreign-capital Enterprise Mortgaging its Property or Rights and Interests to others, exclusively foreign-owned enterprises providing external guarantees should meet those conditions: investors have paid their subscribed capital in accordance with the article of the enterprise; And the time period of mortgage shall not exceed the operating period of the enterprises. Finally, external guarantees by exclusively foreign-owned enterprises involve pledge of stock rights and mortgage on land and property, it also should conforms with the regulation of administrative department for Equity pledge registration and the Department of Land and Real Estate Management for guaranty registered.