Analysis of the Legal Practice of Chinese Dollar Bonds: Evolution of Regulatory Policies, Framework Selection and Key Points of Legal Review

Introduction: The Financial Functions and Historical Missions of Chinese Dollar Bonds

Since the Bank of China issued the first Chinese-funded US dollar bond in the late 1980s, as a milestone innovation in the opening up of China's capital market, Chinese-funded US dollar bonds have always undertaken a dual mission: on the one hand, as a strategic tool for cross-border financing of enterprises, providing international financing solutions for the real economy; On the other hand, as a testing ground for financial opening up, it promotes the in-depth integration of China's capital market with international rules.

Looking back at the historical context, the introduction and development of Chinese dollar bonds have been highly synchronized with the process of China's reform and opening up. In the early 1990s, Chinese enterprises first opened the door to the international capital market. After China's accession to the WTO in 2001, in line with the implementation of the "going global" strategy, US dollar bonds have become an important channel for strategic industries such as infrastructure and energy to obtain foreign funds. The filing system reform in 2015 resonated with the "Belt and Road Initiative" in terms of policies, driving the overseas financing scale of Chinese-funded enterprises to rapidly exceed the level of 100 billion US dollars.

01 Basic Concepts of Chinese Dollar Bonds

According to the definition of "foreign debt" in the "Administrative Measures for the Review and Registration of Medium and Long-Term Foreign Debts of Enterprises" (Document No. 56) issued by the National Development and Reform Commission, the US dollar debts of Chinese enterprises mainly refer to the bonds issued by domestic enterprises in China to overseas investors in Hong Kong, Singapore and other places in US dollars through direct or indirect issuance [1].

02 The regulatory process of China's issuance of Chinese dollar Bonds

(1) From 2000 to 2014, the period of strict supervision under the approval system

At this stage, China adopted an approval-based regulatory model for overseas bond issuance, with the National Development and Reform Commission and the State Administration of Foreign Exchange at its core. In 2000, the National Development and Reform Commission and the People's Bank of China issued the "Opinions on Further Strengthening the Management of External Bond Issuance", clearly stating that enterprises' external bond issuance shall be subject to a qualification review and approval system. The bond issuance qualification shall be reviewed by the National Development and Reform Commission, the People's Bank of China and relevant departments and then submitted to The State Council for approval. The bond issuance qualification shall be reviewed every two years, and local governments are not allowed to borrow from outside. After obtaining the bond issuance qualification, domestic institutions still need to be reviewed by the National Development and Reform Commission and then submitted to The State Council for approval when issuing bonds externally. After approval by The State Council, it will be approved by the State Administration of Foreign Exchange.

(2) 2015-2022, the period of the filing system

From 2015 to 2017, it was a period of relaxation

In 2015, the National Development and Reform Commission issued the "Notice on Promoting the Reform of the Filing and Registration System for Enterprises' Issuance of Foreign Debts" (Document No. 2044), proposing to abolish the approval of the quota for enterprises' issuance of foreign debts and implement the filing and registration system. The notice also proposed to expand the scale of enterprises' foreign debts and support the transformation and upgrading of key areas and industries.

From 2018 to 2022, during the period of volatility, the regulation of urban investment companies and the real estate sector became stricter

For local governments and urban investment enterprises, the focus of their supervision has shifted to preventing risks of hidden debts. In 2018, the National Development and Reform Commission and the Ministry of Finance issued the "Notice on Improving Market Constraint Mechanisms and Strictly Preventing Foreign Debt Risks and Local Debt Risks" (NDRC Foreign Investment [2018] No. 706), strictly prohibiting enterprises from requiring or accepting local governments and their affiliated departments to provide guarantees or assume debt repayment responsibilities for their market-oriented financing activities under any pretext. In 2019, the National Development and Reform Commission issued the "Notice on the Requirements for the Filing and Registration of Applications for Foreign Debt Issuance by Local State-owned Enterprises" (NDRC Office Foreign Investment [2019] No. 666), which stipulates that local state-owned enterprises applying for the filing and registration of applications for foreign debt issuance must have been in continuous operation for no less than three years. Local state-owned enterprises that undertake the financing function of local governments can only issue foreign debts to repay medium - and long-term foreign debts due within the next year. The foreign debts of urban investment companies have officially entered the era of borrowing new to repay old.

In 2019, the National Development and Reform Commission issued the "Notice on the Requirements for the Filing and Registration of Applications for Foreign Debt Issuance by Real Estate Enterprises" (NDRC Office Foreign Investment [2019] No. 778), clearly stipulating that the foreign debt issued by real estate enterprises can only be used to replace medium and long-term overseas debts due within the next year. Real estate foreign debt has officially entered the era of borrowing new to repay old.

(3) Since 2023, the review and registration system has been implemented

In 2023, the National Development and Reform Commission issued Document No. 56, while Document No. 2044 was abolished. Document No. 56 clearly stipulates that the National Development and Reform Commission will implement a review and registration management system for foreign debts and comprehensively strengthen the review efforts, including strictly restricting the use of foreign debt funds, clarifying the compliance conditions for bond-issuing enterprises, and enhancing the reporting system for mid - and post-event supervision, etc.

03 Types of Chinese Dollar Bond Structures

The issuance structure of Chinese dollar bonds mainly includes direct issuance, cross-border guarantee by the parent company, standby letter of credit (SBLC), maintenance agreements and red-chip structure, etc. The main features are as follows:

04 Main Job Contents and Review Points of Domestic Lawyers

(1) Conduct legal due diligence on domestic enterprises

The scope of due diligence under Chinese law includes domestic enterprises that act as issuers (or guarantors) and their significant subsidiaries within the scope of their mergers. Domestic lawyers issue a complete legal due diligence list for all enterprises within the scope of due diligence. The due diligence content mainly includes many aspects such as the enterprise's subject qualification, equity structure, capital contribution situation, major contracts, real estate, intellectual property rights, disputes, and penalties. Among them, domestic lawyers should pay close attention to whether the mortgaged assets, restricted assets, overall liabilities, revenue, and recent profits can cover the interest, especially the company's real estate, ongoing financing guarantee agreements, and ongoing project contracts. Domestic lawyers should pay attention to the restrictive clauses on bond issuance in the contract and prepare the corresponding written exemption letters as required. For foreign debts of urban investment companies, special attention should be paid to documents related to the company's state-owned assets, such as state-owned asset evaluation reports, state-owned asset evaluation filing, and state-owned property rights registration certificates, etc.

For the issuance model where standby letters of credit guarantee is provided by domestic banks, domestic lawyers also need to conduct due diligence on the subject qualifications of the guaranteeing banks and the internal compliance procedures for issuing standby letters of credit.

(2) Review the bond issuance transaction documents

The main transaction documents involved in Chinese dollar bonds include bond issuance circulars (including bond terms), subscription agreements, trust covenants, agency agreements, guarantee covenants, maintenance agreements, etc. Domestic lawyers need to review the parts related to Chinese law among them.

(3) Issue a Chinese legal opinion

Domestic lawyers are required to issue a Chinese legal opinion written entirely in English, mainly expressing legal opinions on the enterprise's subject qualification, ownership, litigation and arbitration penalties, regulatory approval regarding this bond issuance, compliance operation, bond issuance transaction documents, taxation, information disclosure and other aspects.

05 Conclusion

Despite the fact that since 2018, with the increasingly complex and severe international situation and economic environment, the turmoil in the Chinese dollar bond market has intensified, debt default incidents have occurred frequently, and the default amount has also been continuously rising, its position as an important channel for cross-border financing has not been shaken. As of April 2025, the outstanding stock of Chinese dollar bonds remained considerable, with approximately 2,300 outstanding bonds and a bond balance of about 780 billion US dollars (data source: Wind). The current market environment has put forward higher requirements for professional intermediary institutions, especially domestic lawyers. Domestic lawyers need to be more deeply involved in projects than ever before, comprehensively considering practical issues such as issuance structure, issuance cost, and capital return, and through professional legal services, assist domestic enterprises in successfully issuing US dollar bonds.

Footnote:

[1] This article only discusses Reg S bonds and does not discuss 144A bonds for the time being.