Project companies in China are mostly incorporated as limited liability companies (有限责任公司) owned by the sponsors directly or through several levels of holding structures.

A limited liability company may be the only suitable form for a project company that applies to almost all industry sectors as other forms of legal entities ether subject to higher incorporating standards (e.g. companies limited by shares, 股份有限公司) or lack the risk protection of limited liability (e.g. partnership enterprises, 合伙企业).

For foreign investors, other than the Company Law of the People’s Republic of China, the Foreign Investment Law of the People’s Republic of China and its subordinative rules and regulations are another essential series of laws that affects the foreign investment access and the corporate governance of foreign-funded enterprises.

Depending on the credit status of the sponsors, shareholder’s loan, parent guarantee, bank guarantee, share charge of the project company and land or real estate mortgage are all commonly used credit support from sponsors.

A host government usually doesn’t provide directly credit support unless the project is owned or sponsored by itself or a local state-owned company. However, If the project is good enough for considerable employment promotion or local economic development, the host governments are usually happy to provide local tax reduction and exemption or other forms of indirect support at a policy level for the project company as long as they are available within its power.

Generally speaking, subject to the specific financing structure, major project financing security forms widely used in other countries and regions are all available or may be applied in a similar way in China, including without limitation, mortgage of land or other real estate, pledge of movables, charge of shares, deposit in bank accounts or account receivables, contractual long-term exclusive rights (selling, purchasing and operating, etc.) and even possessory lien.

Mortgage, pledge and charge shall in most cases be registered with certain government sectors for protection against a third party’s challenge. For example, real estate mortgages are registered with the real estate registration center, charges of deposit in bank accounts and account receivables are registered with the central bank of China, while share charges are registered with the industrial and commercial bureau.

Generally security shall be enforced by way of auctioning the collateral, which is administered by the enforcement division of local courts. The initial price of such auction shall be not less than 70% of the appraised value of the collateral and if the initial auction failed, the starting price for the second round may be reduced from the initial price by no more than 20%. Before the initial auction, the court shall publish the information for 15 days for movable properties or 30 days for immovable properties, while the publish periods for the second auction (if any) shall be 7 days for movable properties or 15 days for immovable properties.

Alternatively, after the maturity of the secured debt, the debtor may agree with the creditor on the transfer of the collateral as a substitute of repayment in cash, provided that at that time the debtor is neither insolvent nor bankrupt. While for debtors already insolvent or bankrupt, it is no longer admissible to enter into any alternative arrangement with their creditor(s) because by doing so they may prejudice the interest of other creditors.

• It is notable that in China, prior to the maturity of the secured debt(s) even if the debtor and the creditor agree on the transfer of the collateral as a substitute of repayment in cash, the creditor cannot claim the ownership of the collateral but is still in the prioritized position of being repaid with the selling price of the collateral via the auction held by local court.
• It is also worth noting that the laws of China only recognize the valuable properties as a collateral, hence bank account as a type of intangible asset is not legally recognized as a valid collateral while deposit (cash) collateral is legally recognized.
• After the enactment of the Civil Code of China as of 1 January 2021, transfer of collateral to third parties has become legally admissible, which means that if the secured creditor intends to prohibit the transfer of collateral prior to the full repayment of debt(s), he/she shall so indicate in the registration file of the mortgage/pledge, otherwise the collateral may be freely transferred with the registered mortgage/pledge still in effect to any bona fide third-party purchaser, for which the creditor may claim for the selling price as a substitute of the collateral per se or be repaid with such selling price ahead of maturity only if he/she can prove that the value of the collateral may be impaired after the transfer.

The most distinctive risk in China would be the currency convertibility risk, as CNY is not a freely convertible currency. Foreign investors have to complete a filing of their investment with the Ministry of Commerce (the “MOFCOM”) or its local counterpart in order to secure a quota of foreign currency in which their investment returns are to be expatriated, while for any borrowings from foreign lenders for more than one year, Chinese borrowers or Chinese-invested foreign borrowers have to file it with the National Development and Reform Commission (the “NDRC”) or its local counterpart in order to secure a quota of foreign currency in which the repayment is to be made. While in practice, the foreign currency exchange usually depends on the availability of the target foreign currencies to the local banks.

Lenders may also encounter force majeure in respect of quarantine measures as such measures implemented in China may be inconsistent with the WHO’s advice for an indefinite period of time because of the purportedly featured situation in China.

Regulatory risks may also lie with the merger filing or national security review applicable to certain foreign investment, which does not materially vary from the corresponding practice in most foreign jurisdictions.

Any real and legally valid document, to the extent relevant to the dispute, is admissible in evidence in a court, therefore, there is generally no requirement for consent to or filing of project documents for this purpose, except for those very few matters such as the ownership of or mortgage over real properties and the transfer of intellectual properties, the validity of which are prescribed by law to be subject to registration. Meanwhile, there are many types of contracts that are enforceable against third parties only after registration, such as the contract for importation/exportation of technologies, the share charge agreement and the land lease agreement, etc., because they are publicized via registration then may they be enforced against third parties.

According to the Foreign Investment Law, its Implementation Regulations and the prevailing Negative List, foreign investment in the exploration, exploitation and separation of rare earth, radioactive mineral and tungsten, as well as all domestic postal and courier services are all prohibited, while there are many other businesses such as nuclear power station, domestic water transportation companies, public air transportation companies, civil airports and telecommunication companies, etc., shall be controlled by domestic investor(s).

Now subsidies for domestic investors or foreign investors are all cancelled because the aforesaid Foreign Investment Law prescribes a “national treatment” for all foreign investors, meaning that domestic investors and foreign investors are in the same standing except for those limited industries in the Negative List (which can be found at https://www.gov.cn/zhengce/zhengceku/2021-12/28/5664886/files/5b1aecc9c9704b05b7a930eb6fd74e29.pdf).

In the meantime, investment (whether by foreign or domestic investors) in many restricted sectors shall be equally subject to the approval by the respective competent authorities as detailed in the following link http://www.beijing.gov.cn/zhengce/zhengcefagui/202206/W020220617435966160331.pdf. For example, the Mineral Resource Law of China prescribes that the exploration and exploitation of mineral resource (to the extent permissible by law) are both subject to the registration with the natural resource bureau of the local government and granted on a fairly-compensated basis because all mineral resources belong to the Nation. The royalties are usually calculated according to the annual rate determined by the mineral administration authority but charged in a bulk or a few installments, and separately for exploration and mining.

For foreign exchange control, please refer to our answer to Q8.

The development of ESG in China is still in its initial stage. The Environmental Protection Law is the core legislation for environmentally protection issues in China. In addition, the Civil Code has established the green principle, stipulated the green development obligation of relevant subjects. The Securities Law of the People’s Republic of China, amended on March 1, 2020, added a special chapter on information disclosure and investor protection, emphasizing that listed companies shall fully disclose information necessary for investors to make investment decisions.

Recently there have been significant developments in supporting policies related to ESG. For example, the China Securities Regulatory Commission (CSRC) and other governmental authorities have published a series of regulations on environmental information disclosure including but not limited to:

1. In April 2021, the People’s Bank of China, the National Development and Reform Commission (NDRC), the CSRC and other authorities jointly issued the Notice on Printing and Distributing the Catalogue of Projects Supported by Greens Bonds (2021 Edition), unifying the standards for green bonds in China.
2. In June 2021, the Ministry of Ecology and Environment issued the Reform Plan for the Legal Disclosure System of Environmental Information, setting the primary goal of basically establishing a mandatory environmental information disclosure system by 2025.
3. The Green Finance Regulation of Shenzhen Green Special Economic Zone requires that certain listed financial companies registered in Shenzhen must disclose environmental information staring on 1January 2022.

However, there is no mandatory requirement for listed companies to disclose ESG reports separately, only for certain specific listed companies, for example, the listed companies in the “Shenzhen 100 Index” of Shenzhen Stock Exchange shall disclose their social responsibility reports every year, while other listed companies are voluntary in the disclosure of their social responsibility reports.

It is worth mentioning that China has promulgated its first environmental, social and governance (ESG) disclosure standard captioned “Guidance for Enterprise ESG Disclosure”, to take effect on 1 June 2022. This guidance was developed by the China Enterprise Reform and Development Society (CERDS) in collaboration with companies and other experts in the field. It provides disclosure principles, requirements, and metrics for different types and sizes of companies, applicable to the delivery of official ESG reports.

The PPP-related law at the top hierarchy is the Government Procurement Law of the People’s Republic of China and its implementing regulation as well as the Law on Bid Invitation and Bidding, without other legislations specifically governing PPP projects at the level of law.

While there are multiple regulations on PPP projects respectively promulgated by the central and local governments, such as the Guiding Opinions on Innovating the Investment and Financing Mechanisms in Key Areas and Encouraging Social Investment and the Opinions on Strengthening the Administration of Local Government Debts promulgated by the State Council in 2014, as well as the Circular of the General Office of the State Council on Guiding Opinions on Promoting the PPP Model in the Public Service Fields of 2015, for implementing the Guiding Opinions of the MoF, NDRC and People’s Bank of China on Promoting the PPP Model in the Public Service Fields.

Other important PPP regulations and related policies encouraging private investment in public services and infrastructure include the Guidelines on Development of Public-Private Partnership Projects issued by NDRC in December 2014 (NDRC’s Guidelines) and the Notice on Questions Relating to Expanding the Use of PPPs circulated by MoF in September 2014 etc.

The applicability of PPP models in P. R. China are not limited to certain industrial sectors. According to the Article 3 of the NDRC’s Guidelines, PPP model may be widely adopted in infrastructure and public services and is applicable to projects funded by governmental budget or users’ payments, where the examples given include the supply of natural gas, electricity and heat, waste and wastewater treatment facilities, roads, railways, airports and city transportation infrastructures, health, travel, training and elderly-care services, water conservation as well as environmental protection projects.

It is possible for foreign judgments to be recognized and enforced in P.R China, but only under certain conditions according to the Civil Procedure Law of the People’s Republic of China, a judgement rendered in a foreign nation could be recognized and enforced by China court if it:

1. meets the provisions of an international treaty concluded between or acceded to by that foreign nation and China, or
2. accords with the principle of reciprocity.

P.R. China is a member of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) save for its Article V, which means that an arbitral award made in other members of the New York Convention can be enforced in China. Moreover, arbitral awards rendered in Hong Kong S. A. R., Macau S. A. R., and Taiwan District are recognized and enforced in the mainland pursuant to the interregional legal assistance regime.

Under Article 278 of the Civil Procedure Law of the People’s Republic of China, domestic disputes must be arbitrated in China. Only disputes that are “foreign-related” may be arbitrated outside of China. A dispute is foreign-related if it has any of the elements below in accordance with Article 1 of the Interpretation of Supreme People’s Court on Several Issues Relating to Application of the Law of the People’s Republic of China on Application of Laws to Foreign-related Civil Relations (I):

1. At least one of the parties is foreign;
2. At least one of the parties habitually resides outside of China;
3. The subject matter of the dispute is outside of China;
4. The legal facts that lead to the establishment, change, or termination of the transaction occurred outside of China;
5. Other circumstances under which the transaction may be deemed foreign-related.

Therefore, for an offshore arbitration clause governed by Chinese law to be valid, the dispute must be “foreign-related.” If parties are opting for offshore arbitration, it is important that the contract affirmatively state the governing foreign law of the arbitration clause. In the absence of the governing law, a PRC court may interpret the arbitration clause as being governed by Chinese law. As such, an arbitration clause calling for offshore arbitration would be deemed invalid.

According to Article 529 of the Interpretation of the Supreme People’s Court on the Civil Procedure Law of the People’s Republic of China, the parties to a foreign-related contract or property rights/interests disputes may, by written agreement, choose the place of residence of the defendant, the place of performance of the contract, the place where the contract was signed, the place of domicile of the plaintiff, the place of the subject matter, the jurisdiction of a foreign court where the place of infringement is actually associated with the dispute. However, in cases under the exclusive jurisdiction of the courts of the People’s Republic of China, the parties may not agree to choose the jurisdiction of foreign courts.

Cases under the exclusive jurisdiction of the courts of the People’s Republic of China include the followings in accordance with Article 34 and Article 273 of the Civil Procedure Law of the People’s Republic of China:

1. proceedings caused by the estate disputes shall be under the jurisdiction of the people’s court in the place where the immovable property is located;
2. proceedings caused by disputes in port operations should be under the jurisdiction of the people’s court in the place where the port is located;
3. proceedings caused by inheritance disputes should be under the jurisdiction of the people’s court of the place of residence or the place where the main heritage is located at the time of the death of the deceased;
4. proceedings caused by disputes in implementations of contracts of Chinese-foreign joint venture, contracts of Chinese-foreign co-operative enterprise and Contracts for Chinese-foreign cooperative exploration and development of natural resources should be under the jurisdiction of the people’s court of the People’s Republic of China.

There is no general legal framework involving sovereign immunity and waiver in P. R. China. In 2005, P. R. China signed the United Nations Convention on Jurisdictional Immunities of States and Their Property (the Convention) yet has not ratified the Convention so far. Thus the P. R. China still adheres to absolute immunity, which means the State must be immune from suit and enforcement even if the claims arise out of purely commercial activities. Meanwhile the Chinese SOEs are separated from the State subject to the Law of the People’s Republic of China on State-owned Assets in Enterprises unless such Chinese SOEs have been granted with specifical authorities by the State to claim absolute immunity. For example, if the activities of an SOE are commercial in essence rather than part of the activities of the State, then such SOE is usually deemed neither as part of the State nor a body performing functions on behalf of the government. Thus, sovereign immunity will not be available for such SOE’s commercial activities.

(a) the key current issues for project financing in China include:

1. change of law, for example the Constitution has been materially amended for five times since its initial promulgation in 1954, the Corporate Law has been materially amended for four times since its initial promulgation in 1993, and the current Civil Code is the first codified civil law in P. R. China that was enacted as of 1 January 2021; while the timely change of law might be an advantage because it can promptly reflect the new scenario and accommodate the emerging needs, just exposing the financiers and investors to the challenges of adapting themselves to an everchanging legal environment;
2. strict supervision over state-owned assets, which is reflected, inter alia, in the requirements for evaluation and auction as well as the pricing rule in all the disposal of state-owned assets;
3. currency exchange control and administration over external debts;
4. filing requirements applicable to domestic guarantee(s) for oversea loans, oversea guarantee(s) for domestic loans, as well as other form of cross-border guarantees; and
5. further development of legal regime governing mezzanine financing and trust.

(b) emerging trends or topics which should be considered or focused on by project financing stakeholders.

1. The establishment and implementation of unbiased procurement processes, which are acceptable to international sponsors and lenders;
2. emphasis on ESG considerations ensuring consistency with internationally recognized ESG standards;
3. implementation of stricter anti-corruption, AML, anti-terrorism financing and other compliance rules in the financial sector, which has optimized the local market environment, and
4. fresh promulgation by MOFCOM of the Measures on Blocking the Improper Extraterritorial Application of Foreign Laws and Measures and China’s own export control and sanction measures, which provide strong protection for local and Chinese-invested foreign enterprises.

The Renewable Energy Law of the People’s Republic of China, which was enacted as of 1 January 2006, is still in effect and encourages the development of green and renewable energy.

A brand-new Energy Law is expected to be approved by the National People’s Congress after the publicity of its draft bill in 2020. The new Energy Law will provide a general guideline for the national strategy and market operation of both fossil and green energy and is anticipated to shed light on the development of projects for energy transition.

Lacking comprehensive legislation for energy transition, several key regulations need to be referred for projects in connection with the energy transition. For example, the Working Guidance for Carbon Dioxide Peaking and Carbon Neutrality issued in 2022 by the CPC Central Committee and the State Council and the Outline of the 14th Five-Year Plan (2021-2025) for National Economic and Social Development and Long-Range Objectives for 2035 issued in 2021 by the National People’s Congress provide a clear goal of reducing the use of fossil energy and the transformation to green energy by increasing the scale of green energy plants, building green energy market, encouraging green credit financing, etc., providing a vibrant prospect of project development and financing in connection with energy transition.

Other ministerial regulations, such as the Regulation for the Administration of Wind Energy Development and Construction, the Regulation for the Administration of Solar Power Development and Construction and the Interim Regulation for the Administration of Advanced Energy Storage Project published by the National Energy Administration, the Interim Regulation for the Administration of Distributed Generation published by NDRC, etc., provide specific rules and procedures for the approval, construction and operation of project in connection with energy transition.

In addition, there are rggulations in other sector such as the Implementation Plan for Promoting Green Consumption promulgated by the NDRA, the MOFCOM and several other ministries in January 2022, providing for the measures of promoting the choice of green energy instead of traditional energy, such as the expansion of the market for green power/credit trading, and the development of distributed solar power plant on urban buildings, etc..

Major taxes affecting project financing include, inter alias, income tax, value-added tax (VAT) and land taxes (land use tax and land VAT) .

Income taxes generally apply to the revenue generated by the project company, which, by way of loan repayment or dividends, is usually used to repay for the financing of the project. From an income tax perspective, debt is generally a preferrable funding structure compared to equity as the interest of the loan is deductible against the income tax. The deductible interest amount However, the interest deductible can only be calculated below certain rate or be determined by certain per cent of development costs from an accounting perspective.

VAT may be levied at each stage of the project, which may be at different rate or granted with relief/exemption for different projects or sectors, especially infrastructure or renewable energy projects. Thus, to effectively mitigate the VAT, it is recommendable to apply for the tax relief/exemption ahead of the definitive investment decision. It also helps save tax to keep a good record of tax invoices because the payment of the invoiced sums may be deductible against the taxable income.

Land taxes generally apply to the use and transfer of the land used for the project. The land use tax shall generally be levied annually, which may be exempted for certain infrastructure/energy projects.

Common types of funding structures for project financing in China include debt, equity, public funding, etc.

Debt is quite common for project financing, which includes but is not limited to loans and trade financing in the form of factoring or forfeiting extended by commercial or policy-based banks, disbursement of development costs (also known as deferral of interim payments) by contractors, as well as financial leases or conditional sales by other financial institutions.

Equity, by way of direct or indirect shareholding in or contractual control over the project company who develops the project on PPP or concession basis, and investment in REITs (relatively new and less common in China) are also major funding structures.

In between, there is also mezzanine financing in the form of, for example, preferred shares or convertible debt (or bond), which are typical but less common in China.

Public funding is also available for infrastructure and/or national fundamental construction projects, by way of direct/indirect governmental investment or subsidies for investment/loan.

Project bond and streams or royalties for mining deals are also practical, while Islamic finance is quite rare in China.

Major development banks in China include the Export-Import of China (known as “CEXIM”), China Development Bank (known as “CDB”) and the Agricultural Development Bank of China (known as “ADBC”), while the sole export credit agency in China is China Export & Credit Insurance Corporation (known as “Sinosure”).

CEXIM is a state-funded and state-owned policy-based bank, whose roles in project financing include:

1. Providing short/medium/long-term loans approved for foreign trade, including export credit, import credit, loans for offshore contracts and overseas investment, Chinese government concessional loans and preferential export buyer’s credit.
2. Organizing or participating in syndicated loans for the project.
3. Providing other credit security for the project, such as letter of guarantee, letter of credit and forfaiting.

CDB is a state-owned development financial institution, mainly engaged in medium and long-term lending and investment to support the implementation of major strategies for medium and long-term development of China’s national economy, whose roles in project financing include:

1. Providing short/medium/long-term loans for the project to qualified borrowers.
2. Organizing or participating in syndicated loans for the project.
3. Providing equity or mezzanine financing for the project.
4. Providing other credit security for the project, such as letter of guarantee, letter of credit, export/import factoring and forfaiting.

ADBC is the only agricultural policy-based bank in China under the supervision of the State Council, with a mission of supporting the development of agriculture, rural areas and farmers by raising funds through market based on national credit, whose roles in project financing include:

1. Providing short/medium/long-term loans for rural infrastructure or housing projects to qualified borrowers.
2. Underwriting for short/medium project bonds.
3. Providing other credit security for the project, such as letter of guarantee, letter of credit, export/import factoring and forfaiting.

Sinosure is a state-funded and policy-oriented insurance company, whose main products and services include:

1. medium and long-term export credit insurance, outbound investment insurance, short-term export credit insurance, and domestic trade credit insurance.
2. bonds, guarantees and reinsurance related to export credit insurance.
3. accounts receivable management.

First of all, the Guidelines on Project Financing Business promulgated by the China Banking Regulatory Commission (now being the China Banking and Insurance Regulatory Commission) stipulates that for the project finance, the creditor shall require the borrower to purchase commercial insurance and to arrange the creditor to be the first beneficiary in line to claim the insurance policy.

All construction projects in China are mandatorily required to be furnished with workers’ employment injury insurance. In addition, major development banks and financial institutions may also have specific internal guideline for what insurance shall be obtained for the financed project, such as all-risks (including third-party liabilities) and comprehensive property insurance from the very beginning of the construction up to commercial operation or the full repayment of the financing; they may also require the borrower to choose insurance company through public bidding and/or even require each subcontractor to also purchase relevant insurance to cover risks relevant to its own scope of work.

In practice, apart from the fundamental consideration on the bankability of the project, furnishing the appropriate insurance products may well be an effective way of optimizing the terms and conditions of the financing and reducing the financing cost as a whole.