Project Finance in China and for Chinese Sponsors

What project finance in China involves

Project finance in China means lending to a special purpose project company on the strength of the project's future cash flows, with security over the project's assets and contracts and limited recourse to the sponsors. It is used for power generation, renewables, energy storage, toll roads, ports, water and waste, data centres and large industrial plants. In practice, true non-recourse lending is less common onshore than in Europe or the Middle East: Chinese banks frequently require completion guarantees, equity support undertakings or full guarantees from state-owned or creditworthy sponsors.

The market splits into three segments. Onshore RMB project loans are provided by Chinese commercial and policy banks under NFRA rules. Inbound projects by foreign sponsors may combine onshore bank debt with shareholder loans or offshore facilities, subject to foreign debt limits. Outbound projects sponsored by Chinese companies, often in Belt and Road countries, are financed by Chinese policy banks, commercial banks' overseas branches, export credit agencies and multilateral development banks, usually under English law.

For a foreign sponsor or lender, the most important adjustment is to expect less pure risk transfer. Onshore lenders price and approve credit with heavy reliance on the sponsor group, and documentation is shorter than an English-law project finance suite. International structuring disciplines, such as a detailed financial model, independent technical review and a clear waterfall of project accounts, still add value, but they need to be combined with an understanding of how Chinese banks approve credit.

The onshore regulatory framework

Bank lending rules

Onshore banks lend to projects under NFRA's fixed asset loan measures, revised with effect from 1 July 2024, which also cover lending on a project finance basis. Banks must assess project approvals, sponsor strength, cash flow forecasts and security, set drawdowns against construction progress and, above specified thresholds, pay contractors directly through entrusted payment rather than releasing funds to the borrower. Rules are published on the NFRA website.

Project capital

China operates a project capital (equity) system for fixed asset investment. The State Council sets minimum ratios of sponsor equity to total investment, which differ by sector and have been adjusted several times, most notably in 2015 and 2019, to support infrastructure. Lenders will check that the equity is genuine, paid in on schedule and not itself funded by debt that breaches the rules. Certain equity-type instruments and, for eligible public projects, local government special bond proceeds may count towards project capital within limits, which should be checked for the specific sector.

Approvals and land

Projects generally require approval or filing with the development and reform authority, environmental impact assessment approval, land use rights, planning permits and sector licences such as power generation licences or grid connection agreements. Missing or defective approvals are the most common cause of delay in drawdown. Land use rights for infrastructure may be allocated rather than granted, which can limit their value as security.

Foreign sponsors also need to confirm that the project sector is open to foreign investment under the current negative list and whether foreign investment security review applies. Most energy, utilities and manufacturing projects are open, but some infrastructure and resource activities remain restricted. See foreign exchange (SAFE) compliance for the related foreign debt rules.

Inbound structures for foreign sponsors

Foreign sponsors using project finance in China usually choose among three funding patterns. The simplest is onshore RMB debt from Chinese or foreign-funded banks, which avoids currency mismatch because project revenue is in RMB. The second adds shareholder loans from the offshore parent, which are foreign debt and must fit within the project company's capacity under either the total investment gap model or the macro-prudential model, and be registered with SAFE and, for tenors over one year, with the NDRC.

The third uses offshore bank debt raised at the parent or a Hong Kong holding company and injected as equity, which keeps lenders' security offshore but leaves them structurally subordinated to onshore creditors.

The right choice depends on the size of the project, the sponsor's credit and its appetite for currency risk. Many foreign sponsors combine onshore bank debt for most of the cost with a modest shareholder loan for flexibility, and set registered capital and total investment at levels that preserve foreign debt headroom for later needs.

Franchises and the new PPP mechanism

From the mid-2010s, public-private partnership (PPP) projects grew rapidly and contributed to local government hidden debt. In late 2023 the State Council General Office endorsed guidance on a new PPP mechanism that focuses PPP on user-pays projects with operating revenue, delivered through franchise arrangements, with priority to private capital and without government payment obligations that create hidden debt.

Revised Measures for the Administration of Franchises for Infrastructure and Public Utilities took effect on 1 May 2024, issued by the NDRC with other ministries. For lenders, the result is that bankability depends more on tariffs, traffic and demand risk and less on government availability payments. Foreign-invested enterprises can bid for franchises on the same basis as domestic companies where the sector is open. See our page on PPP projects and the NDRC website.

Legacy PPP projects signed under the earlier rules continue under their own contracts, but lenders and investors buying into them should review the payment history, whether the project passed the government's reviews, and whether availability payments are included in the local budget. Secondary acquisitions of operating PPP or franchise companies by foreign investors typically need grantor consent, and sometimes a fresh evaluation of the investor, so timing should allow for that approval.

Security and risk allocation

Charging rights, toll rights and receivables under franchise agreements can usually be pledged and registered in the PBOC Credit Reference Center's unified registration system, which has covered most movable and receivables security since 2021. Step-in rights for lenders are less established than in English-law projects and normally need the consent of the grantor authority.

Power projects deserve special mention. As China moves renewable generation towards market-based pricing, revenue for new wind and solar projects depends increasingly on power market trading and mechanism pricing rather than fixed benchmark tariffs. Lenders now model price and curtailment risk more carefully, and look for sponsor support or long-term offtake from creditworthy buyers. See renewables and clean energy.

An illustrative example helps. Suppose a foreign-invested company develops a grid-side energy storage station in Guangdong. Onshore banks will look first at the approvals and grid connection, then at revenue: capacity leasing to renewable generators, ancillary service income and arbitrage between peak and off-peak prices, each with different certainty.

Because some of these revenue streams are short-dated or market-based, banks are likely to ask for a sponsor guarantee during construction and possibly a cash flow deficiency undertaking during operation, together with a pledge over receivables and the equity. A sponsor that can show long-term capacity leasing contracts with creditworthy counterparties will generally obtain better terms.

Structuring project finance in China step by step

A typical onshore project financing for a foreign-invested project company follows the sequence below. The order matters, because Chinese banks will not approve credit, and will not release funds, until approvals and project capital are in place.

1. Feasibility and approvals. Obtain project approval or filing, environmental and energy assessments, land and planning documents and sector permits.
2. Capital structure. Fix total investment, registered capital and project capital ratio; confirm foreign debt capacity if shareholder loans are planned.
3. Bank selection and credit approval. Present the model, sponsor support and security package to relationship banks; for large projects, form an onshore syndicate.
4. Documentation. Loan agreement on bank forms, mortgage and pledge contracts, sponsor guarantee or completion undertaking, account control arrangements.
5. Registration. Register mortgages at the real estate registry, receivables pledges in the unified registration system and equity pledges with the market regulator.
6. Drawdown. Draw against construction progress, with entrusted payment to contractors above the thresholds.
7. Operation and refinancing. Release completion support after commercial operation tests, then refinance or prepare for a REIT or asset-backed exit.

The common mistakes are predictable: underestimating the time needed for land and grid connection, treating a sponsor letter of comfort as acceptable credit support when the bank expects a guarantee, and failing to align the EPC contract's milestones with the bank's drawdown conditions. Each one delays first drawdown, which is often when cost overruns begin. For larger deals, see syndicated and corporate lending.

Refinancing, green labels and exit routes

Once a project is operating, sponsors usually look to refinance construction debt on longer and cheaper terms. Onshore options include bank refinancing, project bonds and asset-backed securities, and, for eligible infrastructure assets with stable cash flows, the public infrastructure REIT market that China has been developing since its 2020-2021 pilot. A REIT exit allows sponsors to recycle capital, but it requires clean title, complete approvals and a track record of operating income, so lenders' security and consent rights should anticipate it. See China REITs and pre-REITs.

Offshore refinancing is a further option for foreign-owned portfolios. A sponsor holding several operating Chinese projects through a Hong Kong or Singapore holding company can raise a holdco facility or bond secured on shares and distributions, then use the proceeds elsewhere in the group. Lenders to such structures depend on dividends from China, so they look closely at onshore distributable profits, statutory reserves, withholding tax and the timing of profit remittance.

Green and transition labels also matter. Renewable, energy storage and grid projects can qualify for green loans and green bonds under the PBOC and NFRA green finance frameworks, which may improve pricing and investor demand. Lenders will ask for evidence of eligibility, use of proceeds tracking and environmental reporting, which should be built into the information covenants from the start.

Chinese-sponsored projects abroad and project finance in China compared

Chinese contractors and investors abroad commonly finance projects through a mix of policy bank loans from the Export-Import Bank of China or China Development Bank, export credit insurance from Sinosure, commercial bank loans from Chinese banks' overseas branches, and in some cases co-financing with multilateral development banks or international ECAs. Each lender group brings its own requirements: Sinosure-covered loans follow its policy terms, multilateral lenders apply procurement, environmental and integrity standards, and international banks may apply the Equator Principles.

Policy bank and Sinosure terms

Loans from Chinese policy banks and Sinosure-covered commercial loans have their own conventions. Sinosure cover typically protects lenders against defined commercial and political risks in exchange for a premium, often financed into the loan, and imposes conditions on disclosure, amendments, claims notification and recovery that lenders must follow to keep cover. Policy bank loans may require the use of Chinese contractors or equipment, and documents may include confidentiality and cross-default provisions that host-country lenders and multilaterals will want to understand. Where a project combines these with Western ECA or multilateral debt, the intercreditor terms must reconcile different approaches to sanctions, procurement and environmental covenants.

For sponsors used to project finance in China, the overseas model feels more document-heavy but offers clearer risk allocation. Host country issues, including stabilisation clauses, political risk insurance and investment treaty protection, are central. In Southeast Asia, lenders focus on offtaker credit and currency convertibility; in the Gulf, on Islamic co-financing; in the EU, Chinese-backed bidders must also consider the Foreign Subsidies Regulation in public procurement. See international projects and overseas EPC and multilateral development bank sanctions and integrity.

The State Council's outbound investment provisions effective 1 July 2026 confirm that banks may finance overseas investment on market principles, subject to completion of approvals, filings and cross-border fund registration. Sponsors should therefore treat the Chinese outbound steps as conditions precedent to the overseas financing, not as a parallel formality.

How TRW & Co helps with project finance in China

We advise sponsors, contractors and lenders on project financings connected with China, including renewables, energy storage, infrastructure and industrial projects. For outbound projects we negotiate English-law facility agreements, intercreditor and direct agreements, ECA and policy bank documentation and project contracts, and review host-country and investment treaty issues. For inbound project finance in China we advise on structuring equity and debt around project capital, foreign debt and approval requirements, and coordinate licensed PRC law firms on onshore security, approvals and PRC legal opinions. To discuss a project, contact us.