Chinese Loan Contracts

Loan Contracts under the Civil Code

Loan contracts (jiekuan hetong, 借款合同) are regulated by Articles 667 to 680 of Book III of the Civil Code of the People’s Republic of China. A loan contract is defined as an agreement by which the borrower borrows a sum of money from the lender and repays the principal with interest at the agreed time. The Civil Code distinguishes between loan contracts with financial institutions and private lending between natural persons or non-financial entities.

Financial institution loans are governed by the general loan contract provisions of the Civil Code, supplemented by the Commercial Banking Law (Shangye Yinhang Fa) and the regulations of the National Financial Regulatory Administration. Financial institutions must comply with lending limits, collateral requirements, and interest rate regulations. Construction loans (jian she yong dai kuan, 建设用贷款) are a specialised sub-category of financial institution loans, subject to additional requirements regarding project approval, progress monitoring, and disbursement conditions.

Inter-Company Lending Restrictions

Inter-company lending (qiye jian jiedai) has undergone significant regulatory liberalisation. Prior to the 2015 Supreme People’s Court Provisions on Private Lending, inter-company lending was generally prohibited unless it fell within statutory exceptions — lending between affiliated enterprises, lending by enterprise groups, and lending by designated pilot enterprises. Loans outside these categories were void for violating the mandatory provisions against “financial activities by non-financial enterprises.”

The 2015 Provisions (revised 2020) liberalised inter-company lending. Article 11 of the 2015 Provisions provided that a loan contract between two enterprises would not be invalidated solely because of the parties’ status as non-financial entities, provided the loan was made for the borrower’s “production and operational needs” (shengchan jingying xuyao). The revision effectively ended the general prohibition on inter-company lending.

The liberalisation is qualified by exceptions. Loans made for the purpose of lending on at higher interest (zhuandai), loans to illegal activities, and loans made by disqualified lenders remain void. The Supreme People’s Court has also identified loans made through the interbank lending market by unqualified lenders as void. The 2020 revision of the Provisions further refined the “production and operational needs” test, requiring the lender to demonstrate that the loan serves the borrower’s actual business purpose.

Interest Rate Regulation

Interest rate regulation in loan contracts operates through a ceiling system established by the Supreme People’s Court. The 2015 Provisions on Private Lending established a three-tier interest framework. Interest up to 24% per annum was enforceable through court proceedings. Interest between 24% and 36% was a natural obligation — the lender could not sue for enforcement of interest in this band, but if the borrower paid voluntarily, the borrower could not recover payment. Interest exceeding 36% was unlawful, and the borrower could recover any excess payment.

The 2020 revision of the Provisions fundamentally altered the interest rate framework. The revised Article 26 replaced the fixed 24%/36% ceiling with a floating ceiling tied to the Loan Prime Rate (LPR) — the maximum protected interest rate is four times the one-year LPR. As of 2024, with the one-year LPR at 3.45%, the ceiling is approximately 13.8%. Interest above the four-times-LPR ceiling is void, and the borrower may recover excess payments. The 2020 revision substantially reduced the maximum enforceable interest rate from 24% to approximately 15%, reducing the cost of credit in the private lending market.

The revised framework applies to both private lending and financial institution lending, though financial institutions are subject to additional interest rate reporting and disclosure requirements under the NFRA’s interest rate regulations. The Supreme People’s Court has clarified that late payment interest, default interest, and other charges are aggregated with contractual interest for purposes of the four-times-LPR ceiling.

Private Lending (Min Jian Jie Dai)

Private lending (min jian jie dai, 民间借贷) is a significant component of China’s credit market. The Supreme People’s Court’s Provisions on Several Issues Concerning the Application of Law in Private Lending Cases (2015, revised 2020) is the principal legal instrument governing private lending disputes. The Provisions define private lending as lending between natural persons, legal persons, and other organisations, excluding lending by financial institutions.

The Provisions address procedural and substantive questions. Form requirements: Loan contracts of RMB 100,000 or more should be in written form. Loans below this threshold may be established by oral agreement. Validity: A loan contract is formed when the lender delivers funds to the borrower (shiwu hetong, real contract). The lender must prove delivery of funds; the borrower must prove repayment. Relatives’ loans: Loans between relatives are presumed genuine where the lender proves fund transfer and produces a written agreement.

Illegal lending is closely regulated. Lending to fund gambling, drug use, or other illegal activities is void. Lending by persons who make lending their regular business without a financial licence (yeyu jiedai) is void. The 2020 revision added a provision invalidating loans made to “knowingly pathological gamblers” and loans that the lender “knows or should know” will be used for illegal activities.

Supreme People’s Court Private Lending Interpretations

The Supreme People’s Court has issued three major judicial interpretations on private lending: the 1991 Opinions on Private Lending, the 2015 Provisions (revising the 1991 Opinions), and the 2020 Provisions (revising the 2015 interpretation). The 2020 interpretation was itself amended in January 2021 and December 2023.

The 2023 amendments addressed several emerging issues. Online lending platforms: Platform loans are governed by the same interest ceiling as other private lending, and the platform’s liability depends on whether the platform is a lender (direct lending) or a matchmaker (peer-to-peer lending). Transnational lending: Lending across the Taiwan Strait and between mainland China and Hong Kong or Macau is subject to conflict-of-laws rules. Cryptocurrency loans: The SPC has confirmed that cryptocurrency lending falls outside the scope of the Provisions where the cryptocurrency lacks legal tender status.

Conclusion

Chinese loan contract law has undergone substantial liberalisation and regulatory development. The liberalisation of inter-company lending, the adoption of the LPR-based interest ceiling, and the comprehensive regulation of private lending through judicial interpretations have created a sophisticated legal framework. The reduction of the interest ceiling from 24% to four-times-LPR represents the most significant single change, substantially reducing the cost of credit in the informal lending market while creating enforcement challenges for existing and outstanding loans.