Restrictions on loan pre-payments released

Finance is a little easier in China than before, with the newly available option to pre-pay foreign exchange loans.

On 22 April, 2002 the State Administration for Foreign Exchange (SAFE) issued a notice (number 38 of 2002, SAFE Notice regarding Adjusting the Method for Administering Foreign Exchange Purchases for Pre-payments of Loans), in order to release restrictions on pre-payment of foreign exchange loans. Under the Notice, so long as the possibility for pre-payment is stipulated in the loan agreement and the parties actually agree to the pre-payment.

This welcome development supersedes restrictions imposed under a number of previous circulars, such as the 1998 no. 53 Urgent Circular Prohibiting Purchase of Foreign Exchange for Loan Pre-payment, and the a998 no. 50 Circular on Questions Relating to Prohibition on Purchases of Foreign Exchange for Loan Pre-payment. The number 38 Notice by its terms also supersedes other provision in any other legislation which are inconsistent with the terms of the Notice.

The Notice indirectly represents a reminder to banks and their counsel that desired provisions should sometimes be included in loan agreements even if the provisions are unenforceable for the time being. The Notice permits pre-payments only if the loan agreement stipulated pre-payments. Prior to issuance of the Notice, pre-payments of foreign currency debt was forbidden, so a loan agreement scrupulously limited to then current law would not have specified pre-payments and would therefore have left the borrower and lender unable to take advantage of the new rules declared in Notice 38.

The relaxation of restrictions applies only to loans properly registered in China according to the relevant regulations and also applies only to loans under loan agreements with pre-payment clauses. Borrowers are required to use their own sources of foreign exchange for such prepayments where the same exist, and only after exhausting such resources, may application be made to purchase foreign exchange from state sources.

For further information on this please contact Luke Filei on or +86 10 6590 0389 in Beijing or +86 21 6289 6363 in Shanghai.