1. China’s Blooming NPLs Market:1
China’s Blooming NPLs Market:
Entry solutions for foreign investors to participate in its secondary markets

2. Foreword Arthur Chen Partner Chen & Co. Law Firm
NPL investments have boosted in the mainland of China recently and are most active in Guangdong, Zhejiang, Jiangsu and Shanghai. Chen & Co. Law Firm will help the foreign investors take advantage of the opportunities and new environment and achieve greater success in Chinese market.

3. Preface
The Non-performing loans(hereinafter referred to as “NPLs”) of PRC banks and non-bank financial institutions is expected to be RMB 4,800 billion in 2020 according to China Banking Regulatory Commission (hereinafter referred to as “CBRC”) data. The current investment return on NPL portfolios is typically between %, which shows great opportunity for investors. In China’s blooming NPLs’ secondary market, foreign private equity fund is playing a bigger role and deeply involved in recent years.

4. Landscape of the market
Non-performing loans in the mainland of China are expected to increase in the next few years predicted based on China’s macro-economic factors. NPL investments have boosted in the mainland of China recently and are most active in Guangdong, Zhejiang, Jiangsu and Shanghai. It can be summarized as the structure of “ N” to illustrate the existing players in China’s NPLs market. The licensed asset management companies (“AMCs”) (i.e. Big 4 AMCs and two local AMCs in each province) serve as the major source of NPL portfolios for foreign investors. In accordance with relevant regulations in China, only licensed AMCs (the “4 + 2” AMCs) are allowed to acquire NPL portfolios from banks in a substantial scale in the primary market. Therefore, the “4 + 2” AMCs play the role of major suppliers of NPL portfolios in the secondary market. Since only the big 4 AMCs can set up branches across the country and each province is entitled to set up two provincial licensed AMCs who operate within their own province, “4 + 2” is the basic and unified market structure in each province. In the secondary market of each province, there are an enormous number of unlicensed AMCs and funds (“N”), without dominant players.

5. Potential investment structures
There are four potential investment structures that foreign investors usually may take into consideration if they wish to enter China’s NPLs secondary markets:
Direct Investment via HK Special Purpose Vehicle (“HK SPV”);
Investment via Wholly Foreign Owned Enterprise(“WFOE”);
Investment via Qualified Foreign Limited Partner structure （“QFLP structure”）;
Investment through Qianhai Financial Asset Exchange (“Qianhai FAE”).

6. Key considerations for the structures
Direct investment via HK SPV
Direct investment via HK SPV is feasible under PRC laws and regulations, however each transaction for acquiring NPL portfolios by HK SPV is subject to record-filing / registration procedures with relevant PRC authorities, which may be time consuming. For the phase of acquisition of NPLs, both the record-filing of foreign debts with the National Development and Reform Commission (hereinafter referred to as “NDRC”) of the PRC and the record-filing for the cross-border transfer of NPLs with State Administration of Foreign Exchange (hereinafter referred to as “SAFE”) are required to be completed prior to the foreign settlement for the purchase payment with PRC local banks by AMCs pursuant to the relevant circulars promulgated by the PRC NDRC or SAFE.

7. Key considerations for the structures
Investment via WFOE
Investment via WFOE (for example, WFOE incorporated in Shanghai Free Trade Zone) is feasible under certain conditions. The pre-approval from Shanghai Financial Affairs Office may be required if the WFOE’s business scope to be registered and shown on its business license contains “asset management” or “investment”. Otherwise WFOE’s business scope may affect its foreign capital / shareholder’s loans settlement with PRC local bank. Save for the necessary procedures required for the establishment of the WFOE, there is no legal requirement for the obtaining of the specific approval from competent authorities for the WFOE in Shanghai Free Trade Zone to participate China’s NPLs secondary markets, such as the business of purchasing NPLs from Big 4 AMCs / local AMCs and the disposal of NPLs afterwards. Time required for obtaining the required business scope could be significantly long. Afterwards, each NPL transaction is not required for record-filing / registration which may reduce overall time required for NPL investment.

8. Key considerations for the structures
Investment via QFLP structure
QFLPs as piloted schemes in several cities or Guizhou province are generally not permitted to directly invest in NPLs such as Shenzhen according to relevant interim measures promulgated by the respective local governments. QFLP’s indirect investment in NPLs through investment in existing PRC companies’ shares may be feasible subject to face to face discussions with local officials. If such indirect investment is feasible each NPL transaction is not required for record-filing/registration procedures which may reduce overall time required for NPL investment.

9. Key considerations for the structures
The cross-border investment of NPLs in PRC through Qianhai FAE
The cross-border investment of NPLs in PRC through Qianhai FAE started in Qianhai FAE has accomplished an accumulated transaction volume of over RMB9 billion since 2017 according to the introduction of its official brochure.
The relevant official circulars and guideline book are currently not available via public sources. Based on our consultation with officers of Qianhai FAE and the introduction of its official brochure, it is our understanding that,
a) Facilitated by the Qianhai FAE platform which aims in coordination with AMCs, SAFE and PRC local banks as well as in-charge PRC tax bureau, the time required for locating NPLs and handling foreign capital entry and exit can be minimized (even transactions agreed outside of the Qianhai FAE platform can be processed through the Qianhai FAE platform in order to accelerate the mandatory procedures with SAFE, PRC local banks and in-charge PRC tax bureau); and
b) The approval of the PRC NDRC still needs to be procured independently by the AMCs outside the Qianhai FAE platform (although Qianhai FAE can simultaneously initiate liaisons with SAFE and PRC local banks without having to wait for the approval from the NDRC). Qianhai FAE charges 0.5% of the total transaction amount for its full-range services, including transaction matching and liaisons with the three institutions, but excluding liaisons with the NDRC and disposals of NPLs.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as law, accounting, tax, or other professional advice. Please refer to your advisors for specific advice.