Laws of the People's Republic of China

People's Bank of China

Circular of the People's Bank of China on relevant Issues concerning the Improvement of the Negotiable Instrument Business System

Yin Fa [2005] No. 235

All branches, business administration departments, central sub-branches of provincial capitals of the People's Bank of China, all policy-related banks, wholly state-owned commercial banks and joint-stock commercial banks,

With a view to regulating and improving the sound development of negotiable instrument and further clarifying the relevant systems related to negotiable instrument business, the relevant issues are hereby notified as follows,

I.

On the examination of the real trading act of the commercial drafts

In accordance with the provisions in the Law of the People's Republic of China on Negotiable Instruments, the signature and delivering, acquisition and transfer of a commercial draft shall have authentic trade relationship and creditor-debtor relationship. Where the drawer (holder) applies to the bank for handling the acceptance and discounting of the commercial drafts, the bank shall conduct an examination and verification on the authentic trade relationship and creditor-debtor relationship of the commercial drafts hereof.

An examination shall be conducted on the drawer's qualification, credit standing, business contact and items recorded on the drafts by the bank handling the acceptance of the commercial drafts. Where the holder of the commercial drafts applies to the bank for handling the discounting, the applicant shall provide the bank hereof with the original script of the business contact and the value-added tax (hereafter referred to as VAT) invoice or plain invoice issued to the discounting applicant by its direct remote holder's in accordance with related provisions of the taxation system.

Where the bank handing the discounting rediscounts to other banks or applies to the People's Bank for rediscounting, it is not required to provide the business contact, the VAT invoice or the plain invoice between the discounting applicant and its direct prior holder, while it is charged with the responsibility for ascertaining that the formality and connotation accord with the provisions in related laws, regulations and rules.

II.

On the related handlings of the mortgage of the drafts

i.

Where a draft is mortgaged, a form of endorsement shall be made in accordance with the related provisions in the Law of the People's Republic of China on Negotiable Instruments.

ii.

Where the performance of the principal obligation is over and the mortgage of the drafts needs to be relieved, the endorsee shall hand back the drafts mortgaged to the endorser in the manner of clean payment. When the draft is due, the holder of the draft shall exercise the right of the draft in accordance with the related provisions of the payment and settlement system.

iii.

Where the performance of a debt guaranteed by the mortgaged drafts is due, and the endorser fails to fulfill his/her debt, the endorsee is entitled to fulfill his/her right of pledge, but shall not transfer or discount his/her drafts. The endorsee shall fulfill his/her right of bill in accordance with related provisions of the payment and settlement system, when the drafts are due. In case that the endorsee is a bank, the words denoting ¡°mortgaged draft collection¡± shall be written in the reference column of collection credential, with reference to the handling procedure of reclaiming the due commercial drafts.

Where a contract of pledge is concluded between the pledgor and the pledgee, the two parties shall take into full consideration of the time limit of the debt and the time for payment presented on the draft, etc., and also the rights and obligations of the two parties shall be cleared defined in order to avoid the disputes over the drafts.

III.

On the Ways of Inquiry and Responding of the Bank Acceptance Bill

The inquiry and responding of the bank acceptance bill may be conducted in the ways below, in addition to the ways provided for in the Notice of the People's Bank of China on Several Issues concerning the Handling of the Inquiry and Responding of the Inter-bank Acceptance Bill of the Commercial Banks (Yin Fa [2002] No.63).

i.

Inquiry and responding via the large-value payment system. The concrete dealings of the inquiry and responding of bank acceptance drafts shall be in conformity with the related provisions in the Measures of Handling Large-value Payment System (For Trial). (Refer to the attachment for the business-conducting procedures for the inquiry and responding of bank acceptance draft)

ii.

Inquiry via fax. The accepting bank shall fax the first copy (card) of the draft to the inquiry bank after the former receives the faxed inquiry application from the latter.

iii.

Inquiry and responding via the website www.chinacp.com.cn sponsored by China Foreign Exchange Trading System & National Inter-bank Funding Center. A contract shall be concluded between such commercial bank as wishes to adopt the way hereof and China Foreign Exchange Trading System & National Inter-bank Funding Center in order to clearly define the rights and obligations of the two parties.

iv.

Via on-the-spot inquiry. The inquiry bank may send personnel with the drafts to the accepting bank for inquiry.

IV.

Other Related Issues

i.

Where the draft holder with such commercial drafts as have not been transferred through the form of endorsement, entrusts the bank of deposit to collect draft money from the accepting bank, the receiver's name written in the column of collection credential shall be in conformity with the one recorded on the draft; the name of the bank of deposit and the account number may differ from the one recorded on the draft, while the bank of deposit written in the column of collection credential and the one of the receiver recorded on the draft shall belong to the same system.

ii.

Such individuals as have not opened settlement accounts in the banks, when cashing with account-transferring bank draft, shall choose any one of the banking institutions belonging to the same system as the draft-drawing banks or the proxy encashment banks of the draft-drawing banks to present for payment; the encashment banks or the proxy ones shall examine and verify the encashment in accordance with the related provisions of the payment and settlement system.

iii.

The People's Bank, after handling the rediscounting of the commercial drafts for the commercial banks, shall go through the formalities of the recovery of the dues strictly in accordance with the related provisions of the payment and settlement system, and may not require the banks applying for rediscounting to do so in other ways.

V.

This Circular shall be implemented as of October 1, 2005. All branches, business administration departments, central sub-branches of provincial capitals of the People's Bank of China shall transfer this Circular to the urban commercial banks, rural commercial banks, rural cooperative banks, credit cooperatives in the urban and rural areas and foreign-funded banks at the locality of your provinces (autonomous regions and municipalities directly under the Central Government).

The People's Bank of China

September 5, 2005.