New rules govern the mortgaging or pledging of assets to foreign parties

China’s ongoing campaign to restrict bank-sector lending is creating a funding squeeze for businesses across the country. As a result, many PRC-based subsidiaries of foreign companies that are experiencing cash-flow problems have resorted to borrowing from their offshore parent or some other offshore entity in order to mitigate funding pressures. In doing so, they may be asked to provide security to the offshore organization in the form of a guarantee, mortgage or pledge of their assets. How can this be done?

Mortgaging of immovables

Various laws and regulations apply. Pursuant to: (1) the PRC Security Law, (2) the Supreme People’s Court Several Issues Concerning the Application of the PRC Security Law Interpretations, (3) the Measures for the Administration

of Security Provided to Foreign Parties by Domestic Organizations Detailed Implementing Rules (Detailed Rules), and (4) the PRC Property Law, if the mortgaged property is immovable, the mortgage should be registered with the local real estate authority, at which point the mortgage rights in the property are established. Failure to register will mean the right is unenforceable.

Gillian Miao is an associate at Martin Hu & Partners (MHP Law Firm)