Most European groups setting up in China assume funding works the way it does at home, but unfortunately that often isn't the case. Money is plentiful and cheap onshore, but moving it across the border is regulated, and the structure you choose in year one tends to stick for a long time.
This note sets out the main routes for funding a Chinese subsidiary and what each one costs you in flexibility.
The onshore price of money
Chinese banks price corporate loans off the Loan Prime Rate (LPR), published monthly on the 20th. On 20 October 2026 the one year LPR stayed at 3.0% and the five year rate at 3.5%, which is the 17th month in a row without a change.
The benchmark itself may evolve though, as PBOC Governor Pan Gongsheng said in October that the central bank wants to move loan pricing away from its narrow reliance on the LPR towards a broader set of benchmarks.
Different ways to fund a subsidiary
You can borrow locally from a bank in China, in RMB, or the subsidiary can take on foreign debt from the parent or an offshore bank. Also, it can borrow from another local group company. These different options are discussed below.
Local bank borrowing
This is usually the quickest route for working capital. Chinese and foreign banks onshore will lend to a newly established subsidiary, but rarely on a standalone basis. Expect requests for a parent guarantee or a standby letter of credit from your European relationship bank. Sorting this out early saves weeks later.
The big advantage is that the debt and the asset sit in the same currency and no FX mismatch exists.
How a Chinese credit line compares with a European one
A European treasurer will recognise the products but not the terms. At home the core facility is usually a committed revolving credit facility on LMA documentation, running three to five years, with financial covenants and money available for general corporate purposes. In China the standard offer is an uncommitted line, reviewed at least once a year, which the bank can suspend or call on demand.
The money is also tied to its purpose. Working capital loans generally run up to three years, and for larger drawings the bank often pays your supplier directly against the contract and invoice, a mechanism called entrusted payment. Pricing references the LPR and companies with strong credit can borrow below it. The facility documentation usually covers more than loans as well, e.g. bank acceptance drafts, guarantees and trade finance.
Foreign debt from the parent or offshore
Shareholder loans are attractive because they avoid a formal capital increase and can be repaid. But every foreign loan must be registered with SAFE, and the amount is capped. In order to calculate the maximum amount a foreign invested enterprise (FIE) may borrow from abroad, it can choose between two regimes, generally when it registers its first foreign debt.
The investment gap model. The cap is the difference between the total investment and the registered capital, both stated in the company's articles of association. Total investment is the total funding the company plans for, equity plus borrowings, so the gap is the room left for foreign debt. The amount is not set freely: it follows statutory ratios between registered capital and total investment and may vary depending on local SAFE recognition of the registered figures.
Investment gap = Total investment − Registered capital
It is a very rigid methodology, because changing it means changing the articles, and the statutory ratios between capital and total investment still apply.
The macroprudential model. Here the cap is linked to audited net assets:
Ceiling = Net assets × Cross border leverage ratio × Macroprudential adjustment parameter
The cross border leverage ratio is set at 2 for non financial companies. The macroprudential adjustment parameter is currently 1.75, which gives a ceiling of 3.5 times net assets. The regulators may adjust it when they want to steer FX flows.
The enterprise does not simply compare the nominal amount of its foreign debt to the ceiling. It calculates a risk weighted balance of its outstanding foreign debt, which is then compared to the ceiling. The weighting factors are:
● Debt with a term of more than one year: factor 1
● Debt of one year or less: factor 1.5
● Foreign currency debt: an additional amount equal to 0.5 times the foreign currency balance is added on top of the term-adjusted amount.
So a one year USD loan of 100 counts as 150 plus 50, or 200, against the ceiling. The same loan in RMB over two years counts as 100.
The preferred methodology depends on the size of the net assets. A young subsidiary with thin equity usually gets more room under the investment gap model, provided total investment was set generously at incorporation. A mature, profitable entity tends to do better on net assets. It's important to realise that the choice is largely one way, so if the investment gap model is initially chosen, it can be changed once to the macroprudential model, but cannot be switched back.
Two further points. Loans longer than one year may also need a filing with the NDRC before drawdown. And a shareholder loan in EUR or USD leaves the subsidiary with an FX exposure against its RMB earnings, which needs a hedging decision of its own. Also, transfer pricing requirements must be taken into account in case of intra group transactions.
Intercompany loans within China
Onshore group companies can lend to each other directly. The Supreme People's Court considers loans between companies as generally valid when they serve a genuine production or operational purpose, such as temporary transfers between affiliates tied to the supply chain.
A loan is invalid if the lender relends money it borrowed from a bank or another company, so the cash must come from its own equity or operating funds. Interest is only enforceable if agreed in writing, and courts protect rates up to four times the one year LPR at signing, which is 12% today.
In practice, document each loan with a written agreement, internal approval and evidence of how the money was used. Where direct lending carries compliance uncertainty, an entrusted loan through a bank remains an alternative structure.
Cash pools also support liquidity adjustment between member entities and, within a regulated quota, cross-border borrowing. We cover the mechanics here: https://www.terpstra-advisory.com/blog/cash-pooling-china
Practical takeaways
When setting up an entity, set total investment and registered capital with funding in mind, as they determine your borrowing room under the investment gap model.
When using the investment gap model, check whether the macroprudential model would give a better result. However, note that you won't be allowed to switch back.
Build relationships with at least one onshore bank before you need the money. Credit approval for a new subsidiary takes time, and the guarantee structure is usually the bottleneck.
If the group already has one or more entities in China, local intercompany loans are also a possibility, as long as they meet the rules on source and use of funds.
Let's talk
For European companies setting up or expanding in China, the funding structure is worth getting right early. Happy to discuss what it means for your specific setup.
This note is for information only and does not constitute legal or financial advice. Please verify current requirements with your bank or the local SAFE branch.
