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
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 email@example.com or +86 10 6590 0389 in
Beijing or +86 21 6289 6363 in Shanghai.