On 24 December 2012, the Ministry of Finance, the National Development and Reform Commission (NDRC), the People’s Bank of China and the China Banking Regulatory Commission (CBRC) jointly issued and implemented the Notice on Putting a Stop to Illegal Financing Activities by Local Governments (Cai Yu  No. 463).
Document No. 463 mainly takes aim at: the construction of public works projects financed by local governments and their financing platform companies through the attraction of funds from the public, repurchase building-transfer (BT) and other such borrowing methods; injecting capital into or providing security for financing platform companies in a manner that violates regulations; and illegally taking out government debt through finance companies, trust companies or lease financing companies.
Document No. 463 specifies that, without approval, no local government at any level – or any of its agencies, institutions or associations – may directly or indirectly attract funds from the public to construct public works projects. They may not assign the raising of funds to, or arrange for the purchase of wealth management or trust products by, the employees of agencies and institutions, or other individuals, or publicise or induce the public to participate in the financing of projects by financing platform companies.
The above-mentioned provision mainly regulates the sale of current trust products. Document No. 412 of the four ministerial-level authorities specifies that public works projects are government-invested projects that are to provide services for the public good, are non-profit and cannot be operated or are unsuited for operation in a market-oriented manner, e.g. municipal roads, public transport and other infrastructure projects, as well as public health, basic research, compulsory education, affordable housing and other capital construction projects.
Document No. 463 further regulates financing and repurchase acts by governments and their agencies, institutions and associations. The document expressly stipulates that agent-construction system construction and year-by-year repurchase BT with fiscal funds may only be used for public rental housing, roads and other such projects that comply with the law or for which the State Council has provided that government debt may be taken out (there is still some uncertainty as to how this phrasing is to be understood).
Additionally, Document No. 463 requires governments to rationally determine the scale of construction based on the project construction plan, repayment capacity, etc. and implement a year-by-year repayment plan.
Document No. 463 emphasises that governments and their agencies, institutions and associations: (1) may not provide security or provide security in a disguised manner in a way that violates the Security Law, e.g. they may not issue undertakings or letters of comfort that often arise in practice; (2) may not use the state-owned assets of an authority, institution or association to provide security for the financing of another entity or enterprise; (3) may not undertake to assume the debt repayment liability of another entity or enterprise; and (4) may not provide security for the BT agreement of another entity or enterprise.
In fact, the illegal provision of security by local governments was expressly prohibited as early as 2010 by Document No. 19 of the State Council and Document No. 412 of the four ministerial-level authorities, which specified that local governments bore limited liability toward financing platform companies to the extent of their capital contributions, thus internalising the debt risks of such financing platform companies.
Document No. 463 regulates the method commonly used by local governments to package financing platform companies through the injection of public assets and land: (1) they may not inject such public assets as government offices, schools, hospitals, parks, etc., as capital into financing platform companies; (2) if a local government is to inject land into a financing platform company, it must do so by way of the statutory land grant or allocation procedure, and in particular is required to abide by the rules and regulations on allocated land; and (3) they may not inject reserved land as assets into financing platform companies, particularly specifying that a local government may not undertake to use the anticipated grant revenue from reserved land for the purpose of repaying the debt of a financing platform company.
When dealing with land reserves and financing, it is necessary to pay special attention to the Notice on Strengthening the Administration of Land Reserves and Financing (Guo Tu Zi Fa  No. 162) issued by the Ministry of Land and Resources, together with the Ministry of Finance, the People’s Bank of China and the CBRC in November 2012.
Financing platform companies
Financing platform companies are prohibited from assuming land reserve functions and carrying out land reserve financing, in particular the use of land reserve loans in municipal construction for things unrelated to the land reserve is restricted. Additionally, Document No. 463 narrows the financing channels for financing platform companies assuming the construction of public works projects and requiring fiscal funds to make repayment.
Unless otherwise provided in laws or by the State Council, where a financing platform company has incurred a debt for the construction of public rental housing, a road or other such public works project, and needs fiscal funds to make repayment, it may not borrow from a non-financial institution or individual, nor may it directly or indirectly seek financing through the finance company, trust company, fund company, lease financing company or insurance company of a financial institution.
Document No. 463 has had an impact on local governments and their financing platform companies, BT investment and construction entities, the banking industry, the trust industry, etc. Some banking institutions have suspended the approval of loans for the BT projects of local governments, and some financial institutions remain optimistic toward the financing needs of local governments. Accordingly, the specific implementation and operation of Document No. 463 needs further observation, or the issuance of detailed operating rules by relevant competent authorities, to make it clearer and more detailed.
Environment, Resource and Energy Law Committee
All China Lawyers Association
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