On 12 October 2011, the Ministry of Commerce (“MOFCOM”) issued the Circular on Issues Relating to Cross-border Direct Investment in RMB (“the Circular”), following the issuance of a consultation draft in August. On the following day, the People’s Bank of China (“PBOC”) issued the Measures on Administration of the RMB Settlement in Connection with Foreign Direct Investment (“PBOC Measures”). The Circular sets out the regulatory requirements for investments into China with offshore-sourced RMB, lawfully obtained overseas. The PBOC Measures aim to facilitate foreign direct investment in RMB ( "RMB FDI") by clarifying specific implementation measures for onshore settlement banks to handle RMB settlement services in respect of FDI.
The Circular and the PBOC Measures are widely perceived as part of China's efforts to expand cross border use of RMB. They are to facilitate investment by foreign investors without having to convert foreign currency while reducing the risk of fluctuating exchange rates, and ultimately serve the purpose of internationalizing RMB over the long term. It may also help mitigate risks associated with accumulating excessive foreign exchange reserves.
Background
China launched trials of cross-border trade settlement in RMB in July 2009 in accordance with Measures for the Administration of Pilot RMB Settlement in Cross-border Trade and expanded the project to include 20 provinces, municipalities, and autonomous regions in June 2010.
Following two years of experiment in relation to RMB settlements in cross-border trades, a huge quantity of RMB has been accumulated outside of China, mostly in Hong Kong, Macau, Taiwan, and Singapore. Those who hold such offshore RMB used to have only limited channels to invest their RMB funds back into China, such as through certain banks qualified to participate in the domestic Chinese inter-bank market or to purchase RMB-denominated bonds. The Circular now opens a direct investment channel for offshore RMB to flow back into China.
In 2011 alone, Chinese government authorities issued a series of rules regulating offshore RMB, paving the way for a gradually more liberal regulatory regime for offshore RMB to be invested into China.
Apart from the Circular and PBOC Measures, there are the following regulations and notices:
- Circular of the Ministry of Commerce on Issues concerning Foreign Investment Administration 25 February 2011
- Circular of SAFE on Issues concerning Regulation of Operation of Cross-Border RMB Capital Account Items 7 April 2011 - Circular of the People’s Bank of China Clarifying Issues concerning Cross-Border RMB Business 3 June 2011 - Circular of the Ministry of Commerce on Issues concerning Direct Investment with Cross-Border RMB (Consultation Draft) 22 August 2011
Scope of Offshore RMB
In accordance with the Circular, foreign investors have to make RMB denominated FDI into China by using lawfully obtained offshore RMB. This means the foreign investor's offshore RMB funds shall come from a number of particular sources as prescribed in order to be deemed legitimate for RMB FDI projects. These include:
1) Offshore sources
RMB funds that are legally obtained abroad by foreign investors, including:
i) RMB-denominated payments for cross-border import and export
ii) Proceeds from offshore issuance of RMB-denominated bonds or shares
2) Onshore sources
RMB funds received by foreign investors from domestic foreign-invested enterprises (“FIEs”) in which they have invested, including:
i) Profits distributed in RMB by an FIE and dividends or profits repatriated abroad by the foreign investors
ii) RMB payments received by the foreign investors from transfers or sale of their equity or share holdings in such FIEs
iii) RMB repayments due to a reduction in the registered capital of a FIE, or proceeds from liquidation of the FIE's assets
iv) Investment in a cooperative joint venture FIE that is recovered by the foreign investor
Approval Authorities for RMB FDI
All RMB FDI shall be applied to local MOFCOM branches who shall be responsible for review and approval. However, there are exceptions. According to the Circular, MOFCOM’s approvals both at the provincial level and at the central level are required if the RMB FDI projects meet any of the following:
a) Equals or exceeds RMB 300 million
b) Investments are made in certain financing industry sectors, including financial guarantees, financial leasing, micro-finance credit loans or auctions
c) Involves investments in foreign invested investment-type companies, foreign invested venture capital enterprises, or foreign invested equity investment enterprises
d) Involves investments in a sector subject to national macro-control policies, such as cement, iron and steel, electrolytic aluminum and shipbuilding.
The approval of the central MOFCOM must be applied for after the provincial MOFCOM has reviewed the application. The central MOFCOM shall decide whether or not to approve an applicationwithin 5 business days. However, there is no timeline specified for approval at the provincial level.
It’s noteworthy that the PBOC Measures remove the case-by-case PBOC approval procedure for RMB settlement services of FDI applicable at the trial stage as set out in PBOC’s Circular on Clarifying Certain Issues Relating to Cross-Border RMB Services, issued on 3 June 2011.
Prohibitions for RMB FDI
The PBOC Measures provide that all RMB proceeds shall be used for legitimate purposes however remain silent on the specific requirements.
Under the Circular, cross-border RMB FDI shall not be used on securities, financial derivatives, entrusted loans, in addition to general compliance requirements of the PRC law relating to FDI. Nonetheless, legally-obtained RMB capital may participate in private share placement or agreement-based share transfers by domestic listed companies, but related MOFCOM’s approval procedures will be required according to the Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors (2006).
Compared to the early draft of the MOFCOM Circular published for public consultation in August, the final Circular removes the restriction on using offshore RMB for repaying onshore and offshore loans.
It has to be noted that the PBOC Measures are still stringent in terms of management and monitoring of RMB FDI accounts. For example, PBOC Measures require various types of special RMB accounts, such as an Account for Pre-establishment Expenditure of FIE, an Account for Re-investment, an Account for Capital, an Account for Merger or Acquisition, and an Account for General Purpose, depending on the purpose of the RMB in the FDI. The use of RMB in each type of special RMB account shall be restricted to its special purpose and should not used as a current account which means no cash may be deposited or withdrawn from such accounts.
All RMB FDI shall also comply with existing FDI-related laws, industrial policies, and regulations on security as well as anti-monopoly scrutiny of mergers and acquisitions. Specifically, cross-border RMB FDI into China’s real estate industry shall follow the existing approval and filing system for foreign-invested real estate projects.
Conclusion
The MOFCOM Circular and PBOC Measures as well as a series of new regulations issued by the Chinese government in 2011 can be used as guidance for foreign investors who intend to conduct FDI using RMB in China. These new developments are piecemeal and are intended to ultimately usher in the gradual internationalisation of the RMB. It will definitely further promote the development of offshore RMB bond and financing markets, such as Hong Kong and Singapore.
By Simon Bai, Winners Law Firm
WINNERS has been recognised consecutively as "Tianjin Firm of the Year" by two international legal journals: Asia Legal Business from 2008-2011, and by China Law & Practice from 2009-2011.
On 12 October 2011, the Ministry of Commerce (“MOFCOM”) issued the Circular on Issues Relating to Cross-border Direct Investment in RMB (“the Circular”), following the issuance of a consultation draft in August. On the following day, the People’s Bank of China (“PBOC”) issued the Measures on Administration of the RMB Settlement in Connection with Foreign Direct Investment (“PBOC Measures”). The Circular sets out the regulatory requirements for investments into China with offshore-sourced RMB, lawfully obtained overseas. The PBOC Measures aim to facilitate foreign direct investment in RMB ( "RMB FDI") by clarifying specific implementation measures for onshore settlement banks to handle RMB settlement services in respect of FDI.
Prohibitions for RMB FDI 
