Warning on pitfalls of mainland security law

PUBLISHED : Saturday, 11 November, 1995, 12:00am
UPDATED : Saturday, 11 November, 1995, 12:00am

CONFUSION over who qualifies as a creditworthy guarantor in China could limit the effectiveness of the mainland's new security law in the short term, a foreign banker warns.

Andrew Leong, who is the executive director of project finance at Union Bank of Switzerland (Hong Kong), recommended that overseas financiers look into the creditworthiness of both the Chinese guarantor and the debtor to ensure their ability to obey the law.

'Given China's very large geographic area, laws are applied differently on the coast than in inland areas . . . so one must investigate every party that one deals with in China,' Mr Leong told an Asia Law and Practice conference.

China's security law, which covers guarantees, mortgages, pledges, lien and deposits, came into effect on October 1.

The Chinese Government has yet to show that the law was strictly enforced, Mr Leong said.

The approval process for issuing guarantees in China remains unclear, and project financiers - who rely on guarantees to reduce the risk of backing major infrastructure projects - may not be protected by Chinese guarantees.

'Even if you have a water-tight security structure approved at the provincial level, it may not stand up if the principal contract is not valid,' Mr Leong said.

Another problem was that the Chinese were not familiar with many basic principles of project financing, or the obligations of the guarantor if a project were to fall through.

'The Chinese come from an iron rice-bowl society,' he said.

'Things like damages and interest on late payments are very foreign to them. This could be very contentions. China may actually rule against you in the long run,' Mr Leong said.

Mr Leong urged the Chinese Government to enforce the new security law retrospectively in an existing case.

This would establish strong legal precedents and demonstrate the specific applications of the regulations.

'The current laws only begin to scratch the surface of what needs to be in place to encompass a complete legal system,' he said.

He said the trouble was that China's laws were generally interpreted according to the broad intentions of the top leadership, and were often supplemented by informal rules and regulations.