A record number of Chinese enterprises have been investing overseas after the PRC government's unveiling of the One Belt, One Road strategy. This, in turn, boosted the growth of the independent guarantee business of domestic banks, with official figures pinning the total value of independent bank guarantees issued by Chinese banks in 2015 alone at $292.92 billion.

But their selective dishonoring of bank guarantees has been criticized over the years. A number of foreign companies have been aware of the non-enforceability of guarantees issued by Chinese banks due to inconsistency in both local courts' granting of suspension orders for payments under the independent guarantee and decisions regarding guarantee fraud matters. To ensure enforceability and unify court practices, on November 18, 2016 the Supreme People's Court (SPC) issued the Provisions on Several Issues Concerning the Trial of Independent Guarantee Dispute Cases (Provisions), which came into effect on December 1.

The release of these Provisions is a milestone. They define, and set out the scope for, independent guarantees for the very first time. They also recognize the legal effect of domestic independent guarantees—a mark of true judicial innovation in China. Most importantly, they improve the protection of independent guarantees by limiting the issuance of a suspension order and the application of the fraud exception rule. Guarantee fraud is the only means available for challenging guarantee demands in China and has been frequently deployed by domestic businesses to avoid payment.

Traditional court practices

Suspension orders casually granted