I INTRODUCTION

i The transport finance industry

The transport finance industry is a fast-growing business in China, mainly because the Chinese transportation industry has experienced rapid growth and expansion in recent years during the urbanisation of the country and the modernisation of China’s transport infrastructure.

Aviation

China’s civil aviation market is one of the most important and rapidly growing aviation markets in the world. According to the data published by China Aviation Daily, during the period from January to November of 2016, the profits of China’s civil aviation industry hit a historic high amount of 60.13 billion yuan. Solely in 2016, China’s airlines have imported 369 commercial aircraft, and the size of the entire Chinese commercial aircraft fleet has reached 2,933 aircraft.

The aircraft finance industry in China is also growing rapidly, in line with the expansion of the Chinese commercial aircraft fleet. While the industry used to be dominated by foreign lessors and commercial banks, more and more Chinese domestic lessors and investors have started aircraft finance businesses and are expanding their businesses quickly, mostly by using Chinese tax bonded area leasing and financing structures. Owing to the fluctuation in the exchange rate of Chinese currency since 2015, some Chinese airlines have started to seek Chinese yuan funding instead of US dollar funding, to finance their acquisition of aircraft. Some large Chinese lessors have built up their offshore aircraft fleet as well, and have extended their business to the Middle East, South Asia, South America and Europe.

Shipping

China plays an important role in the world’s shipping industry in terms of its shipbuilding and water transportation capacities. According to the data published by the China Association of the National Shipbuilding Industry, during the period from January to November 2016, the national shipbuilding enterprises reached 1,469 with the prime operating revenue being 697.57 billion yuan. In 2016, China’s completed tonnage was 35,320,000, and the new order tonnage was 21,070,000, representing 35.6 per cent and 65.2 per cent of the global market share.

Despite the downturn of the shipping market after the financial crisis in 2008, certain Chinese lenders have continued to be active in ship financing. The leading banks that provide shipping finance include the Bank of China, the Export-Import Bank of China and the China Development Bank. An increasing number of financial leasing companies have also participated in the shipping finance industry through financial leases and bareboat charters.

Rail

Owing to its importance in China’s economy, China’s rail industry is highly controlled and influenced by the state. Before 2013, most of the Chinese rail assets were directly owned and operated by the Ministry of Railway and its local bureaus. After 2013, China established China Railway Corporation (CRC), which is one of the largest state-owned companies in China, to own and operate China’s rail assets. After the establishment of CRC, the Ministry of Railway was dissolved and consolidated into the Ministry of Transportation.

Owing to CRC’s dominant position in the industry, the finance of rail equipment is mainly through CRC’s bank lending, bonds issuance and financial leases. The state also encourages private capital to invest in the railway sector, especially for the construction and operation of intercity railway, urban (suburban) railway, railway designed for resource development and branch railway field.2 The public–private partnership model, which is very popular in China for attracting private capital in the infrastructure industry, has also been adopted by the rail industry.

ii Recent changes

China has boosted bank credits, cut taxes and embarked on a massive infrastructure spending programme in a wide-ranging effort to mitigate the adverse effect of the financial crisis in 2008 and the slowing-down world economy. These stimuli extend to the transport industry as well, and it is expected that, during 2016 to 2020, China will invest 15 trillion yuan in the transport sector (which includes 3.5 trillion in rail transportation, 7.8 trillion in road transportation, 0.65 trillion in civil aviation and 0.5 trillion in water transportation).

The main transport financers in the Chinese market include:

  • a the four big state-owned commercial banks, which are Bank of China, China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China);
  • b the policy banks, which include China Development Bank, and the Export-Import Bank of China;
  • c certain large commercial banks focusing on transport section, such as the Bank of Communications;
  • d the financial leasing companies and the domestic and foreign-invested leasing companies; and
  • e the foreign banks that specialise in transport finance sector.

The noteworthy changes in China’s transport finance sector in the past five years include:

  • a the fast growth of the Chinese leasing industry and the rise in Chinese lessors;
  • b the reformation in China’s value added tax system and, after the reformation, the PRC lessees are permitted to deduct their value added taxes paid for capital expenditures; and
  • c the establishment of a number of tax bonded areas and free trade zones and these areas and zones help to create Chinese tax bonded lease structures for aircraft and ship finance.

II LEGISLATIVE FRAMEWORK

In China, the sources of laws that may affect the transport finance include:

  • a the laws made by the National People’s Congress (NPC) and its Standing Committee;
  • b the administrative regulations made by the State Council;
  • c the administrative rules made by the ministries, commissions and departments of the State Council;
  • d the local regulations and autonomous regulations made by the local people’s congresses and their respective standing committees;
  • e the local administrative rules made by the local governments;
  • f the judicial interpretations to the relevant laws made by the Supreme People’s Court of the PRC; and
  • g the international treaties and conventions approved by the NPC and its Standing Committee.

For the transport finance transaction that does not involve foreign parties, the legal documentation has to be governed by Chinese law. For cross-border transport finance transactions, parties are allowed to select the governing law of the documentation they prefer, and the laws of England and New York are usually preferred by the financers.

On 28 October 2008, China ratified the Cape Town Convention on International Interests in Mobile Equipment and the Aircraft Protocol. According to China’s declarations, the Cape Town Convention does not apply to Hong Kong SAR and Macao SAR. To implement the Cape Town Convention, in 2009, the Civil Aviation Administration of China (CAAC) issued the Measures on Regulation of Applications for Authorisation Codes for Registrations with the International Registry and the Administrative Procedures for the De-registration of Nationality of Civil Aircraft according to an Irrevocable De-Registration and Export Request Authorisation.

i Domestic and international law and regulation

China’s transport industry is regulated by different regulatory agencies, which include:

  • a the CAAC for civil aviation;
  • b the National Railway Administration of the PRC for railway transportation;
  • c the Water Transportation Agency under the Ministry of Transportation for domestic water transportation; and
  • d the Maritime Safety Administration (MSA) of the PRC for maritime transportation.
Aviation

In China, the nationality, ownership, mortgage rights, priority rights and leasehold interest and airworthiness management in respect of China-registered civil aircraft and the Chinese civil aviation industry are governed by the Civil Aviation Law of the PRC (Civil Aviation Law) and the administrative rules and orders issued by the State Council and the CAAC.

The CAAC maintains a civil aircraft nationality register (CAAC Nationality Register) and a civil aircraft rights register (CAAC Rights Register). The CAAC Nationality Register is an operator-based register and is now operated by the Airworthiness Department of CAAC. The CAAC Rights Register is now operated by the Legal Department of CAAC and can register the relevant party’s rights to civil aircraft. To date, there is no separate rights register for aircraft engines.

China has designated the CAAC as an authorising entry point for registration on the International Registry. According to the CAAC’s regulations, the parties have to obtain authorising entry point (AEP) codes from the CAAC to perform registrations in the International Registry against aircraft with Chinese nationality. The Legal Department of the CAAC is now responsible for granting the AEP codes.

Shipping

The branch offices of the MSA are the authorities that administer the nationality and rights registrations of vessels that fly the Chinese flag, according to the Maritime Law of the PRC, the Regulations on Vessel Registration of the PRC and the administrative rules issued by the MSA. Vessels that can fly the Chinese flag include:

  • a vessels that are owned by a Chinese citizen who has domicile or main place of business in China;
  • b vessels that are owned by an enterprising legal person established according to the laws of China and with their principle place of business in China (if such legal person is a foreign-invested company, the equity owned by the Chinese investor is no less than 50 per cent, unless otherwise permitted by the MSA);
  • c public vessels of the Chinese government or vessels owned by Chinese institutional legal persons; and
  • d vessels on bareboat charter to Chinese entities.
ii Specific practices

Compliance with China’s foreign exchange regulations is essential for foreign financers’ financing to a Chinese debtor in transport finance, particularly in respect of the rules on foreign debt control and provision of cross-border security for the financing. The State Administration of Foreign Exchange (SAFE) is the authority responsible for enforcement of China’s foreign exchange regulations. The completion of the applicable foreign debt and cross-border security approval, filing and registrations requirements are normally conditions precedent for the disbursement of the financing.

Foreign debt regulation

For regulation purposes, the foreign debt refers to the financial indebtedness (which may be in the form of a loan, a cross-border financial lease or an issuance of bonds) of a Chinese debtor to a foreign creditor. To take on a foreign debt, the Chinese debtor needs to ensure that it has a sufficient foreign debt quota (such quota is determined according to a formula by reference to the Chinese debtor’s net assets, the applicable cross-border finance leverage ratio and China’s macroeconomy adjustment factor), and must complete the filing with the National Development and Reform Commission (NDRC) or its authorised local counterpart (since 14 September 2015, the financial indebtedness of the offshore entity controlled by a Chinese enterprise is also required to be filed with NDRC). In addition, after the execution of the relevant foreign debt agreement, the Chinese debtor needs to register such agreement with the SAFE and such registration is a pre-condition of the Chinese debtor to open a bank account to receive the funds of the foreign debt and to remit funds out of China to repay the foreign debt.

Cross-border security regulation

According to the SAFE regulations, a security arrangement may constitute a cross-border security if:

  • a the provider of the security makes a legally binding undertaking to the creditor that it will perform the relevant payment obligation according to the security agreement; and
  • b such arrangement may cause cross-border payment and receipt of funds or cross-border transfer of asset ownership.

The security arrangement may take the form of a guarantee, a pledge, a mortgage and other forms of security that are permitted by applicable law.

For a cross-border security arrangement, if the provider of the security is established and registered in China, and the debtor and the creditor are established and registered in offshore jurisdictions,3 the provider of the security is required to register such cross-border security with SAFE. There are also certain conditions for using such cross-border security structure in certain particular types of finance, including:

  • a if the secured debt is in the form of issued bonds, the Chinese security provider shall have, directly or indirectly, equity interest in the debtor;
  • b if the funds of the secured debt are used to acquire equity interest in, or are to be borrowed by, an offshore entity, the acquisition of such equity interest and the lending should comply with the outbound investment regulations of the Chinese authorities; and
  • c if the secured debt is a payment obligation under a derivative transaction of the debtor, the purpose of such derivative transaction should be for hedging only, and such transaction should be within the debtor’s business scope and duly authorised by its shareholder or shareholders.

If the provider of the cross-border security is established and registered in an offshore jurisdiction, and the debtor and the creditor are established and registered in China,4 the following conditions need to be satisfied:

  • a the Chinese debtor has to be a non-financial institution registered in China;
  • b the Chinese creditor has to be a financial institution registered in China;
  • c the secured debt has to be a yuan or foreign exchange lending (other than entrusted loans) or a legally binding lending commitment; and
  • d the form of the security must comply with Chinese law and the applicable foreign law.

According to the SAFE rules, the Chinese creditor needs to report the relevant financial data secured by such security structure to SAFE, and after enforcement of the security, the Chinese debtor needs to register its obligation to indemnify the offshore security provider as a foreign debt.

III FINANCIAL REGULATION

China’s financial industries are highly regulated.

The People’s Bank of China (PBOC) is China’s central bank, which formulates and implements China’s monetary policies. The PBOC is also responsible for maintaining and supervising China’s payment, clearing and settlement systems, regulating China’s interbank markets and manages China’s foreign exchange and gold reserves. The PBOC oversees SAFE, which is the regulator of China’s foreign exchange, and normally the head of SAFE is also a vice president of the PBOC.

The China Banking Regulatory Commission (CBRC) is the regulator of China’s banking industry. It supervises banks, financial leasing companies, asset management companies, trust and investment companies as well as other deposit-taking financial institutions. Certain foreign-invested leasing companies and domestic leasing companies are regulated and supervised by the Ministry of Commerce of the PRC (MOFCOM).

The China Securities Regulatory Commission is the regulator of the securities, capital and futures industries of China, and the China Insurance Regulatory Commission is empowered to regulate and supervise China’s insurance market.

i Regulatory capital and liquidity

China did not implement Basel I – it moved directly to Basel II and Basel III. Since 2012, China has issued a number of regulatory guidelines and rules to set forth the roadmap and details to implement Basel III in China, including:

  • a the core elements of Basel III standards in the Regulations on Management of Commercial Bank’s Capital promulgated in June 2012 (the Capital Regulations);
  • b the supplementary documents for implementation of the Capital Regulations promulgated in October and November 2012;5 and
  • c the implementation policies and documents as to regulation of commercial banks’ capital promulgated on 19 July 2013.6

The Capital Regulations, and its supplementary documents and implementation policies and documents, comply with the implementation schedule set forth by Basel Committee on Banking Supervision for Basel III, and apply to all commercial banks incorporated in China, and certain non-bank financial institutions (including group financial companies, consumer finance companies, financial leasing companies, automobile finance companies, lending companies and rural credit cooperatives). The Capital Regulations do not apply to policy banks that do not accept deposits from the public.

In a few areas, China has adopted a stricter approach than the minimum standards prescribed by Basel, including:7

  • a The Capital Regulations not only apply to China’s international banks, but also apply to all other commercial banks, including those small banks and local banks.
  • b There is no phase-in arrangement for the minimum capital ratio. Commercial banks should meet a minimum ratio of 5 per cent CET1, 6 per cent Tier 1 and 8 per cent total capital as of 1 January 2013. The minimum requirement for CET1 is 5 per cent rather than 4.5 per cent as required by Basel. The requirement for CET1 including the capital conservation buffer is 7.5 per cent instead of 7 per cent as required by Basel.
  • c The Capital Regulations generally apply a risk weight of 1,250 per cent to commercial banks’ equity investments in commercial entities, with the only exception of a 400 per cent risk weight applied to ‘equity investments in commercial entities passively held by the bank within the legally prescribed disposal period’ and ‘equity investments in commercial entities made by the bank owing to policy reasons and with the special approval of the State Council’.
  • d Under the Standardised Approach for credit risk, claims secured by residential property are risk-weighted at 50 per cent rather than 35 per cent, the minimum required by Basel.
ii Supervisory regime

Lending is a regulated business in China and Chinese law generally prohibits an unlicensed Chinese company from lending money to another Chinese company (cross-border loans are not subject to such prohibition). Therefore, lending between Chinese companies is usually done through a licensed Chinese bank through an ‘entrusted loan’. Under an entrusted loan, the lender, the borrower and the entrusted Chinese bank will enter into an entrusted loan agreement and the lender will disburse the loan to the borrower through the entrusted bank. The lender, not the entrusted bank, shall bear all borrower’s credit risks by itself.

China also has mandatory requirements on the portion of the loan provided by a Chinese bank in the whole investment amount of the financed project (the maximum lending ratio). Such maximum lending ratios vary according to the industry of the financed project. As to transport-related industries, the maximum lending ratios are 20 per cent for railway, road and urban railway transport project, and 25 per cent for airport, harbour and coastal and inland waterway projects. The State Council is empowered to change such ratios from time to time, according to the circumstances of China’s economy.

A Chinese financial institution’s ability to provide finance to a debtor may also be limited by the applicable regulatory requirements. For example, for a financial leasing company regulated by the CBRC, its ability to provide financial leasing finance to a lessee may be limited by:

  • a the single customer finance concentration ratio: in other words, the unpaid balance of all financial leases to a single company may not exceed 30 per cent of its net capital;
  • b the single group customer finance concentration ratio: in other words, the unpaid balance of all financial leases to all companies within the same group may not exceed 50 per cent of its net capital;
  • c the single related party finance ratio: in other words, the unpaid balance of all financial leases to a single related party of the financial leasing company may not exceed 30 per cent of its net capital;
  • d the all related party finance ratio: in other words, the unpaid balance of all financial leases to all related parties of the financial leasing company may not exceed 50 per cent of its net capital; and
  • e the single shareholder finance ratio: in other words, the unpaid balance of all financial leases to a single shareholder of the financial leasing and all related parties of such shareholder may not exceed all capital contributed by such shareholder.

The lendings and financial leases from offshore companies to the Chinese debtors are subject to the foreign debt regulations discussed above, and the relevant Chinese debtor shall have sufficient foreign debt quota and complete the relevant foreign debt filing and registration procedures.

IV SECURITY AND ENFORCEMENT

The lenders usually take a mortgage8 over the financed aircraft, vessel and rolling stock as security of the finance. Pledge over financed aircraft, vessels and rolling stock is rare as, for perfection of pledge interest, the pledged asset need to be possessed by the pledgee or a person on behalf of the pledgee. According to the Civil Aviation Law and the Maritime Law of the PRC, the mortgage over a civil aircraft is governed by the laws of the state where the aircraft is registered and the mortgage over a ship shall be governed by the law of the flag state of the ship. In practice, as to the finance of aircraft registered in China but owned by offshore entity, it is not unusual that the financer will also take a mortgage over the aircraft governed by the foreign law (which is usually the law of the state of incorporation of the offshore owner).

Under Chinese law, the financial lessor can obtain the legal title to the leased property that serves as the security to the lessee’s obligations under the financial lease.

Aircraft

The following rights and security interest can be registered with the CAAC Rights Register:

  • a owner’s title to the aircraft;
  • b mortgagee’s mortgage right to the aircraft;
  • c priority right to the aircraft;9 and
  • d lessee’s possessory right to the aircraft under a lease duration that is no less than six months.

According to the Civil Aviation Law, it is not mandatory to register the title of the mortgage or possessory right in a civil aircraft with the CAAC Rights Register, but without such registration the title, mortgage or possessory right have no legal effect against other bona fide third parties; and without registration with CAAC Rights Register, the relevant party’s priority right shall terminate on the date falling three months after the occurrence of the event out of which such priority right arose.

The priority rights to a civil aircraft shall have priority over the security interest in the civil aircraft in relation to compensation concerning such civil aircraft.

After the Cape Town Convention took effect in China, the CAAC Rights Register and the International Registry have functioned in parallel. Filing with the International Registry is a must if the creditor wishes to retain its priority under the Cape Town Convention, and the registration with CAAC is necessary to preserve its priority under Chinese domestic security law.

Shipping

The following rights and security interest can be registered in the register book maintained by the MSA:

  • a the owner’s title to a completed vessel or a vessel under construction, and, if applied by the owner, the vessel’s funnel mark or house flag;
  • b the mortgagee’s mortgage right to the vessel; and
  • c the bareboat charter.

According to the Regulations on Vessel Registration of the PRC and the rules issued by the MSA, it is not mandatory to register the title of or the mortgage right in a vessel with the MSA, but without such registration, the title or mortgage rights have no force against other bona fide third parties. It is a mandatory requirement to register the bareboat charter if the bareboat charter is related to a domestic charterer chartering a PRC-flagged vessel, a domestic charterer chartering a foreign-flagged vessel or a foreign charterer chartering a China-flagged vessel. During the period of the charter, the charterer cannot register the reletting of the vessel without the prior consent of the vessel owner. Additionally, the mortgage rights over a vessel under a registered bareboat charter can only be registered if the registered charterer’s consent has been obtained.

As to international conventions on property rights and security interests, China signed the International Convention on Maritime Lease and Mortgages on 18 August 1994. However, this convention has not been ratified yet and is not effective in the Chinese jurisdiction.

Rail

China does not maintain a register of title or other rights in respect of rolling stock. The mortgage over rail stock is treated as a mortgage over moveables.

The mortgage over moveables can be registered with the local office of the State Administration of Industry and Commerce (which maintains the company registry in China) where the mortgagor is registered.

i Financing of contracts
Aircraft

In China’s market, the financers to Chinese airlines include export credit agencies (ECAs), Chinese banks (including both commercial banks and policy banks), foreign commercial banks, Chinese lessors (including both CBRC-regulated financial leasing companies and the MOFCOM-regulated leasing companies) and foreign lessors. The financing may take the form of direct lending, financial leases, operating leases, ECA financings and other structured financings.

The typical security package to the financer of the aircraft may consist of:

  • a mortgage over the aircraft;
  • b assignment of insurances;
  • c airframe and engine warranties assignments;
  • d assignment of lease agreement;
  • e pledge over receivables in respect of the aircraft;
  • f guarantee from the parent company;
  • g escrow and pledge over the relevant bank accounts; and
  • h pledge over the equity of the special purpose project company.
Shipping

Chinese law permits a mortgage over a ship under construction. A Chinese shipbuilder may mortgage its ship under construction to a financial institution in China to obtain finance, and such mortgage can be registered with MSA’s ship register. The shipowners are not allowed to mortgage the ship under construction yet.

Normally, the account bank of the Chinese shipbuilder can issue a pre-delivery payments refund guarantee in favour of the shipowner, and the shipowner can assign such guarantee together with its interests and rights under the shipbuilding contract to its financer as security of the pre-delivery payments finance.

The typical security to the financer of the ship may consist of:

  • a mortgage over the ship;
  • b the general pledge and assignment of insurances, ship charters, etc.; and
  • c pledge over receivables in respect of the ship.
Rail

Typically, the CRC will contract with the rolling stock manufacturers for purchase and finance the purchase of rolling stock through its financers.

ii Enforcement

Chinese law does not expressly accept ‘self-help’ remedies or equivalent concepts. However, if the debtor or mortgagor does not cooperate, the creditor may have to enforce its rights through legal actions of the court.

The mortgage agreement can provide for the circumstances in which the mortgage may be enforced and contractual rights that the mortgagee may have upon enforcement. The typical trigger events that would result in enforcement of the mortgage include the failure to pay any amount due under the financing or the occurrence and continuance of other event of default.

In addition to the mortgagee’s contractual enforcement rights under the mortgage agreement, the Security Law of the PRC and the Property Law of the PRC also provide for certain statutory rights for the mortgagee to enforce the mortgage, which include the auction of the mortgaged property, the transfer of the ownership of the mortgaged property to the mortgagee with consent of the mortgagor after the enforcement to satisfy the debt, and the private sale of the mortgaged property with consent of the mortgagor. Under Chinese law, it is not lawful to set forth in the mortgage agreement that the mortgagee can foreclose the mortgaged directly upon enforcement.

iii Arrest and judicial sale
Arrest

Under Chinese law, a creditor may petition to the competent Chinese court to arrest the aircraft, ship or the rolling stock upon enforcement:

  • a either before the litigation, if the creditor can show to the court that the circumstances are urgent and the creditor’s lawful rights and interests will suffer irreparable harm without immediate preservation of the aircraft, ship or rolling stock; or
  • b during the litigation process, if the creditor can show to the court that without arrest of the aircraft, ship or rolling stock it will be impossible or difficult to enforce the subsequent court judgment or order, or will cause other damages to the creditor because of the actions of the mortgagor or other reasons.

If the action is brought up against the mortgagor in a foreign court rather than a Chinese court, it would be very difficult for the Chinese court to order asset preservation against the mortgaged property in China.

The arrest of ships is not dealt with by the ordinary people’s court in China, but is subject to the jurisdiction of maritime courts of the PRC (a special type of court formed to hear maritime litigation).

Judicial sale

If the debtor is not cooperative upon enforcement, the creditor may sue the debtor and petition to the court to enforce its rights. Set out below is a general description of the typical civil litigation procedures in China:

  • a A bill of complaint is submitted to the appropriate court, setting forth the name and address of the defendant, the claim and the facts and legal bases of the case and the evidence that will support it. The Chinese court in the location of the domicile of the defendant has jurisdiction.
  • b If the Chinese court finds the bill of complaint acceptable (within seven days), it will file the case and will send a copy of the bill of complaint to the defendant (within five days from such filing). For the party that files the lawsuit, a court fee will be payable, as well as the usual litigation costs.
  • c The defendant should file a bill of defences with the court (within 15 days).
  • d After the court determines the date of trial, a trial will be held and a judgment rendered (within an extendable six-month period), although appeals to higher courts are permitted.

In addition to the above, parties to a dispute may reach a settlement agreement at any time before judgment (therefore, a court-approved mediation settlement is permitted to be entered into between a foreign lessor and a Chinese airline). If a settlement agreement is reached, the court will draw up a mediation decision. If a judgment or mediation decision requires enforcement, additional court fees as well as actual expenses for enforcement must be paid by the party seeking enforcement.

To facilitate enforcement of security interest and improve protection of the creditor, the Civil Procedure Law of the PRC (Civil Procedure Law) also provides for a fast track procedure for enforcement of security interest. According to the Section 7 of Chapter 15 of the Civil Procedure Law, provided that there is no substantive dispute, the holder of the security interest may petition to the court for auction or sale of the property subject to the security interest. In this fast track procedure, the court would review and determine whether the conditions for enforcement of the security have been satisfied. If the answer is affirmative, the court will make an enforcement order within 30 days.

As to those security documents that are submitted to the jurisdiction of foreign court, in the event that a final and conclusive judgment is obtained from the foreign court, such judgment can be recognised and enforced in China without re-examination or relitigation on the subject matter thereof, if the following conditions are met:

  • a the judgment is made by a foreign court with competent jurisdiction and is final and conclusive;
  • b the jurisdiction of the foreign court is not precluded by any law, order or treaty;
  • c service of process for any proceeding against the Chinese party in the jurisdiction of the competent court has been lawfully effected on the Chinese party (other than by public notice), or the Chinese party has appeared and responded on the merits of the case in the relevant proceedings without receiving service thereof;
  • d the court of China is satisfied that the judgment neither contradicts the basic principles of the laws of China nor violates China’s state sovereignty, security and public interest; and
  • e judgments of the Chinese courts receive reciprocal treatment in the jurisdiction of the foreign court. As a matter of Chinese law, this means that there exists a bilateral or multilateral treaty concluded or acceded to by China and the jurisdiction of the foreign court as to the mutual recognition and enforcement of judgments. To date, there has been no bilateral or multilateral treaty between China and United Kingdom or United States in connection with recognition or enforcement of court judgment. Therefore, the judgments made by the United States or United Kingdom court cannot be enforced in China directly.

V CURRENT DEVELOPMENTS

i Recent cases
Aircraft

In China’s records, there are very few precedent cases regarding repossession and enforcement against civil aircraft. The bankruptcy of Dongxing Airline after the financial crisis in 2008 and the repossession of the aircraft leased to Dongxing by GECAS has been an important case that tested the Chinese laws for a foreign operating lessor to repossess its aircraft.

Shipping

A recent case is the arrest of a dry bulk carrier named ‘Futong 09’. Owing to a dispute in respect of a loan to Wuhu Futong Shipping Co, Ltd and the shipowner, Far Eastern Leasing Co, Ltd and Pudong Branch, Bank of Shanghai Co, Ltd jointly brought an action in the Shanghai Maritime Court and reached a mediation agreement through the court. According to the mediation agreement, Futong Shipping Co, Ltd and the shipowner agreed to pay the loan, failing which Far Eastern Leasing Co, Ltd and Pudong Branch, Bank of Shanghai Co, Ltd shall be entitled to petition the court to auction Futong 09 and be paid from the proceeds of the auction. Because the Futong Shipping Co, Ltd and the shipowner failed to perform the mediation agreement, Far Eastern Leasing Co, Ltd and Pudong Branch, Bank of Shanghai Co, Ltd applied for enforcement by the court. The Shanghai Maritime Court established a special committee, and consulted the Shanghai United Assets and Equity Exchange to carry out an online auction and auctioned the dry bulk carrier.10 The proceeds of the auction of Futong 09 were distributed to Far Eastern Leasing Co, Ltd and Pudong Branch, Bank of Shanghai Co, Ltd and the crew of the vessel and other related creditors according to Chinese law. This case is one of the recent tries made by the Chinese court to facilitate enforcement and protect the creditor.

ii Developments in policy and legislation

To boost the economy, China aims to cut its overall tax burden of the enterprises and has continued to reform its turnover tax system. One development of note is the further reformation in China’s value added tax policies, particularly on deduction of value added tax on the interest paid by a Chinese debtor to the financial institutions from its overall value added tax payable, and the share of value added tax revenue between the central government and the local government, which may affect the fiscal incentives provided by the local government to attract financers in the transport finance industry.


Footnotes

1 Wang Shu and Zhu Jun are partners and Zhang Ling is an associate at Han Kun Law Offices.

2 NDRC, the Ministry of Treasury, the CBRC and other authorities, Fa Gai Ji Chu [2015] No. 1610, ‘Implementing opinions on encouraging and expanding the investment of private capital in the construction of railways.’

3 Such cross-border security structure is called neibaowaidai in Chinese.

4 Such cross border security structure is called waibaoneidai in Chinese.

5 The full names of these documents are the Supervisory Guidance on Capital Instruments Innovation for Commercial Banks and the Notice of the CBRC on Transition Arrangements for the Implementation of the Capital Rules for Commercial Banks.

6 These policies and documents include the Notice on Measurement Rules of Capital Requirements for Bank Exposures to Central Counterparties (CCPs); the Notice on Enhancing Disclosure Requirements for Composition of Capital; the Notice on Regulatory Policies for Implementing IRB of Commercial Banks; and the Notice on Policy Clarification of Capital Rules. These policies and documents provide for further clarifications and rules on exposures to central counterparties (CCPs), disclosure requirements for capital instruments, requirements for internal ratings based approach (IRB) implementation and certain technical clarifications.

7 The Assessment of Basel III regulations-China published by Basel Committee on Banking Supervision on 27 September 2013. The full report is available at www.bis.org/press/p130927.htm.

8 ‘Mortgage’, according to Article 33 of the Security Law of the PRC, means, the obligor or a third person secures the performance of an obligation by property without handing over possession thereof and upon failure of the obligor to perform the obligation that the mortgage secures.

9 Article 19 of the Aviation Law provides that the following creditor’s rights have priority over those of a mortgagee of a civil aircraft: (a) the reward for rescuing the civil aircraft (this refers to salvage awards); and (b) the necessary fees for safekeeping the civil aircraft (this refers to costs of necessary repair, maintenance and so forth).

10 Supreme People’s Court. Ten Model Cases regarding Arrest and Auction of Vessels by Maritime Courts across the Country. Case regarding Arrest and Auction of ‘Futong 09’ by Shanghai Maritime Court.