What is the current legal landscape for Lending & Secured Finance in your jurisdiction?

The legal system of the People’s Republic of China (“PRC” or “China”, for the purpose of this article excluding Hong Kong Special Administrative Region, Macau Special Administrative Region and Taiwan), with the Constitution Law as its foundation, forms a pyramid structure comprising multiple levels including laws, administrative regulations issued by the State Council, local regulations and regulatory rules. The current legal landscape for Lending & Secured Finance primarily involves three levels hierarchy: laws, administrative regulations and regulatory rules, and relevant judicial interpretations issued by the Supreme People’s Court constitute a vital component of the PRC’s legal regime for Lending & Secured Finance.

Playing in a highly regulated industry, financial institutions that can grant lending and various lending products are also subject to administrative regulations and regulatory rules. In China, capital account is still subject to foreign exchange control. In a broader sense, especially for cross-border lending and secured finance, administrative regulations, foreign exchange policy and regulatory rules jointly set clear constraints on transaction structure, fund circulation and security arrangement etc. Such constraints are designed to prevent cross-border capital risks, maintain national balance of payments stability, and standardize the compliance operation of outbound and inbound financing businesses.

Fundamental provisions

The Civil Code of the People’s Republic of China (the “Civil Code”), as the overarching civil law of the PRC, plays a fundamental role in regulating lending and secured finance by providing comprehensive provisions on loan contracts, guarantees, security interests (including mortgage, pledge, lien etc.), and the protection of creditor’s rights. Given that the Civil Code is fundamental, highly abstract and generalized in nature, judicial interpretations were formulated to explain how to apply the provisions of the Civil Code in practical matters. Such judicial interpretations include the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the General Provisions Part of the Civil Code of the People’s Republic of China, Interpretation (I) of the Supreme People’s Court on Several Issues Concerning the Application of the Property Rights Part of the Civil Code of the People’s Republic of China, Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Security System under the Civil Code of the People’s Republic of China, Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the General Provisions of the Contract Part of the Civil Code of the People’s Republic of China etc..

Furthermore, the provisions related to marriage and family, succession and tort etc. of the Civil Code, the Company Law of the People’s Republic of China and the relevant judicial interpretations etc. should also be considered carefully in certain deals.

The upcoming Financial Law of the People’s Republic of China (Draft) (the “Financial Law”), which is currently in the legislative process, is expected to further improve and systematize the legal framework for the financial sector. It emphasizes that all financial institutions and financial business within the territory of China shall be subject to supervision, and a strict financial licensing system shall be implemented.

Provisions for local financial institutions

Any institution conducting financial business within the territory of China must obtain the relevant license issued by competent authorities and subject themselves to supervision. An institution conducting lending, guarantee or similar business in China should establish, operate and do business according to the Commercial Bank Law of the People’s Republic of China, Regulations of the People’s Republic of China on the Administration of Foreign-funded Banks, Measures for the Administration of Finance Companies of Enterprise Groups and Regulation on the Supervision and Administration of Financing Guarantee Companies (as the case maybe).

Regarding lending transactions, the most important regulations include the Administrative Measures for Fixed Asset Loans, the Administrative Measures for Working Capital Loans, the Administrative Measures for Personal Loans, the Administrative Measures for Commercial Bank M&A Loans and the Administrative Measures for the Administration of Syndicated Loan Business. The abovementioned regulations set out specific regulatory requirements for different types of loans, including project evaluation requirements, requirements for loan agreements, distribution and payment methods of loans and post-loan review requirements. Other than the above, Interim Measures for the Administration of Internet Loans of Commercial Banks was published in 2020 to regulate the personal loans and working capital loans provided to eligible borrowers by a commercial bank using an online system, which has been growing rapidly in recent years.

Regarding credit evaluation, relevant clients shall pay attention to the Guidelines on Due Diligence in the Credit Evaluation of Commercial Banks and Guidelines on the Management of Risks of Credits Business by Commercial Banks to Group Clients, and check if the regulatory requirements on the proposed loans to be granted by a Chinese bank can be fulfilled.

Please note that all the abovementioned laws and regulations apply to any transaction entered into by a Chinese financial institution, even if the relevant loans are directly granted to a foreign borrower.

Provisions related to cross-border transactions

1. Regarding foreign debts, the most important regulations are Notice by the People’s Bank of China on Matters Concerning the Across-the-Board Macroprudential Regulation of Cross-Border Financing, Administrative Measures for the Examination and Registration of Medium and Long-term Foreign Debts of Enterprises issued by the National Development & Reform Commission (the “NDRC Regulation”) and the accompanying documents such as registration guidelines, etc. A PRC enterprise is only allowed to borrow foreign debt within its foreign debt quota, which will be determined based on its financial data according to the abovementioned regulations. Thus, no foreign debt can be borrowed if no quota is available. Regarding the NDRC regulation, please note that the debt owed by a foreign enterprise controlled by a PRC company to a foreign creditor with a period of more than one year is also defined as a “foreign debt”, and subject to the quota control and registration requirement of the NDRC Regulation.
2. Regarding overseas lending by Chinese bank, such transaction shall comply with the Notice of the People’s Bank of China and the State Administration of Foreign Exchange on Overseas Lending by Banking Institutions. Such notice has some specific requirements on the purpose of loan, which the relevant parties shall pay attention to.
3. Regarding overseas lending by Chinese enterprise which is not a financial institution, it shall comply with the Administrative Measures for Overseas Lending by Domestic Enterprises, which was published in March 2026. It expressly provides that both RMB and foreign currency loans from a PRC non-financial institution enterprise to a foreign company are subject to this provision.
4. Regarding cross-border guarantee and security interest, clients shall pay attention to the Provisions on the Foreign Exchange Administration of Cross-border Guarantees and Guidelines for the Foreign Exchange Administration of Cross-border Guarantees. Generally, if (i) the guarantor/security provider is within China, while those of the debtor and the creditor are outside China, or (ii) the guarantor/security provider is outside China, while those of the debtor and the creditor are within China, such transaction shall be registered with the competent bureau of the State Administration of Foreign Exchange.

Given that it is a complex legal system, the above introduction covers only the key laws and regulations in Lending & Secured Finance sector. Other legal provisions may also affect lending and secured loan transactions, such as Green Credit Guidelines, regulations related to improving granting loans to small and micro enterprises etc., but due to space constraints, these will not be discussed further here.

 

What three essential pieces of advice would you give to clients involved in Lending & Secured Finance matters?

Aligning the dispute resolution clauses of loan agreement and its collateral agreements

Efficiency in terms of cost and time is the key point shall be taken into account when drafting dispute resolution clause. It will be most efficient if (1) the claims to all the obligors, i.e. borrower, guarantor(s), security provider(s), can be filed to one dispute resolution procedure, either litigation or arbitration, and (2) the judgment/arbitral award can be enforced by the court of the place where the obligors’ main assets locate. For PRC law governed guarantee and security documents choosing PRC litigation, if the loan agreement chooses litigation outside mainland China or arbitration, the PRC court has to spend the procedure against the guarantor/security provider till the final decision regarding the loan agreement as PRC law takes the position that the guarantee and security documents are collateral to the loan agreement in its validity and obligation scope of the guarantor/security provider. Therefore, it is advisable to align the dispute resolution mechanism of the loan agreement and collateral agreements (collectively, “Finance documents”).

For this purpose, when PRC obligor(s) are involved, all the Finance documents can choose either PRC court litigation or arbitration (PRC or offshore). This advice is important to an offshore lender as for cross-border transactions, loan agreement and security document normally prepared by different law firms: loan agreement usually choose the law of the place where lender incorporated while guarantee and security document choose the law of the place where the guarantor is incorporated or where the collateral is located. Offshore lender in-house counsel needs to align the two sets of Finance documents governed by different law for the following reasons:

The PRC court recognizes and enforces arbitration award, either issued by a PRC arbitration institution or an offshore arbitration institution. For cross-border transaction, if all finance documents choose arbitration, even choose an offshore institution, lender can enforce the arbitral award against a PRC obligor at the place where its assets locate as China is a contracting party to Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

It is worth noting that under PRC law, arbitration clause in facility agreements cannot cover its collateral agreements. If the arbitration institution chosen by the loan agreement accepts the dispute against guarantor or security provider and issues an arbitral award when guarantee/security documents contain no arbitration clauses on the ground that arbitration clause in loan agreement can extend to its collateral documents, the PRC court may decide such arbitral award cannot be enforced by the PRC court as there is no arbitration clause.

Another reminder is the PRC court of the place where borrower is incorporated or chosen in the loan agreement is required to exercise jurisdiction over the guarantor unless the loan agreement and guarantee/security documents expressly choose different courts.

A recent reported case shows that PRC courts do accept the claim against the guarantor and security provider when the creditor chooses not to sue borrower and the facility agreement choose arbitration or litigation in offshore jurisdiction when the final decision has been issued. This case takes some surrounding circumstances into account. Offshore lender needs to seek PRC legal advice when they decide to do so.

 

Monitoring “debt occurrence period” and “guarantee period” when a PRC law governed guarantee is involved

Debt occurrence period

PRC law does not recognize all money guarantee. To make the obligation of the guarantor more predictable in terms of amount and time, PRC law recognizes a maximum amount guarantee to cover multiple occurring debts. The debt occurrence period agreed in a maximum amount guarantee refers to the time period within which the covered debt shall “occurred”. In another word, a debt “occurred” out of this time period is not covered by the guarantee. When the underlying agreement covered by a maximum amount guarantee is banking facility agreement, utilization of facility is “occurrence” of debt. Therefore, when a facility can be multiple utilized or is documented as evergreen master agreement, lender shall monitor and ensure the availability period, or the actual utilization when the facility agreement does not specify an availability period, fall within this debt occurrence period.

Guarantee period

“Guarantee period” is another unique legal concept under Chinese law. It refers to a time period within which the creditor shall claim its right under the guarantee against the guarantor. Creditors’ rights under the guarantee are cut when they fail to claim the guarantee within this period. Claim for the purpose of securing guarantee period can be (i) requesting guarantor to perform its obligation, and/or (2) filing legal action (litigation or arbitration, as the case may be).

Listing relevant registration certificates as conditions proceeding for utilization in cross-border transactions

Foreign debt registration

PRC entity’s foreign debt borrowing is subject to registration with various authorities, depending on the term, amount and the types of the borrowers. The maximum amount of foreign debt that a PRC Entity can borrow will be determined on case by case basis according to the term of the debt, borrower’s financial data and the formula stipulated in various regulations.

The most important regulations are Notice by the People’s Bank of China on Matters Concerning the Across-the-Board Macroprudential Regulation of Cross-Border Financing, Administrative Measures for the Examination and Registration of Medium and Long-term Foreign Debts of Enterprises issued by NDRC and the accompanying documents such as registration guidelines, etc.

Registration of cross-border guarantee/security

According to the Provisions on the Foreign Exchange Administration of Cross-border Guarantees and Guidelines for the Foreign Exchange Administration of Cross-border Guarantees, if (i) the guarantor/security provider is within China, while those of the debtor and the creditor are outside China, or (ii) the guarantor/security provider is outside China, while those of the debtor and the creditor are within China, such transaction shall be registered with the competent bureau of the State Administration of Foreign Exchange.

Such registration will not affect the effect of the security agreement or the security interest, however, failure to complete such registration will cause inability of cross-border remittance of proceeds from the enforcement of the guarantee or security interest.

Chinese Foreign Exchange Administration Regulations emphasizes and the regulatory authorities will focus on reviewing the authenticity of foreign exchange business. Clients shall not circumvent foreign exchange approval or conduct false registration, which may result in administrative penalties.

Given the complexity of PRC foreign exchange control regime, which is subject to repaid changing, it is advisable to seek PRC law legal opinion and advice on case by case basis regarding the document(s) that shall be set forth as condition proceeding the utilization of facility and confirmation of satisfaction of such conditions.

 

What are the greatest threats and opportunities in Lending & Secured Finance law in the next 12 months?

Development and improvement of financial legal system

Given that China’s civil and commercial law and financial legal systems are still undergoing rapid development, legal updates will continue to have some unpredictable effects on market entities in the short term; however, in the long run, a well-developed legal system will contribute to market stability and healthy development. Meanwhile, China’s statutory law system, combined with judicial interpretations and the system of guiding precedents, boasts the advantage of adapting to market development and achieving dynamic iteration and upgrading.

It is expected that with the formal enactment of the Financial Law, China’s financial regulatory system will become more refined and established, and oversight of financial markets will be more standardized and stringent. It is worth noting that the current draft of the Financial Law incorporates the “substance over form” regulatory principle into statutory provisions for the first time, which is stricter than the regulatory requirements in many jurisdictions. Foreign clients need to pay particular attention to the fact that China’s financial regulation will not merely require formal legality and compliance, but also require substantive legality and compliance of financial conduct, prohibiting the evasion of regulatory provisions or the concealment of illegal and non-compliant activities through seemingly compliant means.

Continuously expanding and deepening market opening

China has continuously expanded and deepened the opening-up of its financial sectors in recent years, focusing on optimizing market access, facilitating cross-border business, and aligning regulatory standards with international practices. Foreign ownership restrictions in related financial institutions have been fully lifted, while key policy adjustments have been made to support the development of cross-border loans and guarantees. For instance, the leverage ratio for overseas loans of foreign-funded banks in China has been raised from 0.5 to 1.5, expanding their capacity to meet the financing needs of overseas enterprises. Meanwhile, restrictions on foreign-invested companies using domestic loans for equity investment have been abolished, further broadening financing channels for foreign enterprises in China.

RMB Internationalization

Another noteworthy thing is the latest progress in the internationalization of the RMB. According to the RMB Internationalization Report (2025)⁽¹⁾ released by the People’s Bank of China (“PBOC”), from 2023 to the first half of 2025, RMB internationalization recorded remarkable growth in scale and status, with strengthened financing functions including loans. Cross-border RMB receipts and payments for clients hit RMB 64.1 trillion in 2024, up 22.6% year on year, and reached RMB 34.9 trillion in the first half of 2025, up 14.0% year on year. The RMB has solidified its position as the world’s second-largest trade financing currency, third-largest payment currency and third-largest currency in the SDR basket. In the loan market, outstanding overseas RMB loans exceeded RMB 2 trillion by the end of 2024, accounting for 45% of total foreign currency-denominated overseas loans, 14 percentage points higher year on year. By June 2025, overseas entities held RMB 1.15 trillion in onshore RMB loans, and the local currency share in cross-border financing rose to 47.8%.

Recently, PBOC and State Administration of Foreign Exchange (“SAFE”) published two new regulations together: (i) Notice of the People’s Bank of China and the State Administration of Foreign Exchange on Adjusting Matters Related to Overseas Lending of Banking Institutions on 15 April 2026 (“Notice”), and (ii) Administrative Measures for Overseas Lending by Domestic Enterprises on 20 March 2026 (“Measures”). The Notice raises the leverage ratios for foreign-funded banks from 0.5 to 1.5, i.e. overseas lending quota of such banks are three times higher than before, and raises the leverage ratios for China Export-Import Bank from 3 to 3.5. The Measures establish a unified framework for both RMB and foreign currencies for overseas lending by Chinese non-financial enterprise, eliminate existing institutional frictions to enhance corporate efficiency and cost-effectiveness, reshaping and simplifying the accounts requirements related to overseas lending, meanwhile expand Chinese enterprise’s overseas lending quota by 20%. Based on the advantages of RMB loan abovementioned, all of these measures will encourage enterprises to borrow loans denominated in RMB directly or through their affiliates in China, further improving the degree of RMB internationalization in the global loan market.

 

How do you ensure high client satisfaction levels are maintained by your practice?

To maintain high client satisfaction in advising lending transactions, our team take effort to get a better understanding of the clients’ house style and their internal requirements, especially those globally operating financial institutions and corporates. Such clients are subject to the laws and regulations of various jurisdictions for compliance purpose and have different risk appetite and their own internal risk management arrangements. Enforceability under PRC laws and compliance of PRC regulatory rules are not the only point that shall be ensured by a transaction legal adviser. Certain clauses in legal documents (loan document and collateral document) shall meet standard and criteria higher than that of PRC laws and regulations. Our international perspective and understanding of internal control of various risks by different clients facilitates the enhancement of client satisfaction.

Being detail-orientated is another key point to ensure high client satisfaction. With long time experience advising cross-border structured transactions and working with legal counsels (inhouse and external) in various jurisdictions, we can tell the key junctions that a transaction might encounter and normally see requirements of financial institutions of different jurisdiction before the clients raise up. Other than answering the questions raised by clients only, we always point out the key issues that clients shall consider or to ensure at early stage, even in the deals that we are only engaged to prepare legal documents. We also remind the clients to ensure the design of structure can be implemented and accommodated by their back office working process and operational on-line system. Paying attention to detail distinguishes our team in the market as this can avoid not only operational risk, but also the unpleasant surprise in terms of cost and time.

Being creative and innovative is also a value we can add to our legal advice. This capability highly depends on our familiarity of the transactions/products in lending industry and latest position/practice of PRC court and regulatory authorities. Thanks to the going global strategy, new technology and RMB internationalization, lending products are expanding in China. The business requests from this latest development in Chinese lending industry drive us to these new regions. PRC law and regulations related to lending industry, especially related to security arrangements newly recognized by PRC Civil Code, have been developing very fast and the position of PRC court practice established in reported leading cases has become more and more certain. Applying the rules so established, we can come up with more creative solution in advising the transaction structure.

 

What technological advancements are reshaping Lending & Secured Finance law and how can clients benefit from them?

Technological progress within PRC, including big data, blockchain, cloud computing and AI are fundamentally reshaping the legal practice of Lending & Secured Finance, while giving rise to new legal issues and corresponding solutions.

Big data is extensively applied in credit assessment and verification of transaction authenticity. It has expanded data sources for credit evaluation, improved assessment accuracy, addressed part of information asymmetry, assisted clients in enhancing their credit ratings, securing more favorable financing terms and broadening financing channels, particularly in the field of supply chain finance.

Blockchain technology is employed in registration, smart contracts, and transaction traceability. It has established a decentralized security registration system, elevated the efficiency of perfection by publication, enabled automatic performance of smart contracts, reduced performance risks, ensured the immutability of transaction data, and enhanced the probative force of evidence. This allows clients to streamline operation procedures, cut relevant costs, mitigate default risks and improve transaction security.

Cloud computing and RPA have realized business process automation and electronic contracting, enabling the entire lifecycle of loan applications, approval, and contracting to be conducted online. The legal validity of electronic contracts has been duly recognized by law, reducing transaction costs, enhancing compliance management efficiency, and achieving full-process recordation.

China ranks among the world’s leaders in the application of AI technologies. AI has become a core driving force in China’s loan market. In credit evaluation, it integrates multi-dimensional legal data to portray borrowers’ credit. Machine learning and generative AI support risk assessment and fraud identification. In operational efficiency, AI automates loan approval, cutting costs and shortening the cycle from days to seconds, with cases like a postal savings bank branch in Shandong has developed an AI-based transaction flow intelligent review system, which processes each flow in only 5 minutes, 12 times more efficient than manual verification, while effectively identifying fake flows and avoiding over-credit. This efficiency improvement has made it commercially sustainable for financial institutions to serve long-tail customers such as individual households and SMEs. Additionally, AI optimizes the entire loan lifecycle: pre-loan intelligent customer acquisition accurately identifies users with real financing needs; post-loan, AI monitors borrowers’ operating conditions and repayment capacity in real time to predict risks in advance. Guided by national policies that encourage digital empowerment in financial services, AI applications in the loan market are further standardized, balancing innovation with data security and consumer rights protection, and continuously promoting the high-quality development of China’s credit industry.

Nevertheless, in the financial sector where safety is paramount and stringent regulatory requirements prevail, the adoption of new technologies shall be subject to more rigorous review, assessment and verification. On the other side, clients should understand and keep updated of the relevant financial technology regulations and policies in the PRC to ensure compliance in their business. It is advisable that experienced legal counsel should be involved as early as possible in any fintech project so they can obtain comprehensive solutions integrating technology and law and safeguard their legitimate rights and interests.

 

⁽¹⁾(https://hzfimage.mofcom.gov.cn/attach/202511/20251127143743684.pdf)