Debit Finance in China

Published on this site: November 29th, 2006 - See more articles from this month

Registered Capital vs. Total Investment

The difference between an Foreign Invested Enterprise's (FIE's) authorized Total Investment amount and its Registered Capital defines it maximum permitted debt funding:

Authorized Total Investment - Registered Capital = Maximum Permitted Debt
An Fie's proportion of Registered Capital to authorized Total Investment (and thus maximun permitted debt) are regulated and subject to the approval of the FIE's original examination and approval authority.

The permitted ratios of Registered Capital to Total Investment are:

At least 70% in Registered Capital for Total Investments of US$3 million or less (thus US$2.1 million in equity and US$900,000 in debt for a US$3 million Total Investment); At least 50% or US2.1 million in Registered Capital (whichever is greater) for Total Investments of over US$3 million up to US$10 million.

At least 40% or US$5 million (whichever is greater) for Total Investments of over US$10 million up to US$30 million; and At least 33.3% (one-third) or US$12 million in Registered Capital (whichever is greater) for Total Investments of over US$30 million.

Foreign Invested Holding Companies (FICLS) are allowed to maintain higher debt levels. Please dee "Holding Company" under " Alternatives" for details.

There are three main sources of debt funding available to Fies:

1. Foreign exchange loans (including shareholder loans) - obtainable from local institutions to extend foreign exchange loans or overseas financial institutions. They must be registered with the State Administration of Foreign Exchange (safe) or its local branch so that foreign exchange can be obtained for repayment.
   
   
2. RMB loans - obtainable for local financial institutions; keep in mind, however, that not all financial institutions are licensed to extend RMB loans.
   
   
3. Loans from Foreign Invested Holding Companies - see the section on FIHC for more detail. The FIHC must typically be invested in an FIE before it can extend loans to it.
   

Bad Funding Ideas:

1. Group Finance Companies - theoretically possible, but likely to be more trouble than it's worth.
   
   
2. Intra-group lending - frowned upon by the Chinese authorities and illegal in most instances.
   

David Carnes - is licensed to practice law in California. He speaks and reads Mandarin Chinese and has several years experience working with Chinese law firms and Sino-American joint ventures. His website, China Breezes, is at http://www.lunaticwisdom.com/blog1.