Circular on Issues Concerning Cross-Border RMB Direct Investment (Draft for Comment)

Issuing Body: Ministry of Commerce
Issuing Date: August 22, 2011

The Ministry of commerce (MOFCOM), the primary regulator of foreign-direct investment (FDI) matters in China, issued a Draft Circular on Issues Concerning Cross-Border RMB Direct Investment (Draft RMB Investment Circular) on August 22, 2011.  If enacted, it will permit foreign investors to use RMB funds that are legitimately obtained outside China to make direct investments in China. The period for public comment ended on August 31, 2011.

Background

China has allowed the limited use of RMB to settle cross-border trades since July 2009, under the umbrella of the People's Bank of China's Administrative Measures on a Pilot Program for Renminbi Cross-Border Trade Settlement. Those rules allowed certain qualified domestic enterprises (subject to the recommendation of the local governments and PBOC approval) to engage in import and export business with foreign companies using transactions settled in RMB, with the foreign party to the transaction obtaining and holding the RMB offshore. Compared to transactions settled in foreign currency, trades settled in RMB involve simpler import/export procedures and enable transaction parties to avoid foreign exchange risks.

The Chinese government first introduced the pilot scheme in five large cities in China, including Shanghai, in 2009. It initially allowed qualified onshore firms to use RMB to settle cross-border transactions with transaction parties only in Hong Kong and Macau. When the pilot program succeeded, the PRC government expanded the program throughout China, with onshore firms being allowed to use RMB to settle transactions with transaction parties around the world.

According to Chinese government statistics, in 2010 the total amount of RMB used in cross-border settlements was RMB506.7 billion. Because the RMB is not a freely convertible currency, however, some foreign businesses outside China have been accumulating a large amount of RMB which they could not freely spend or invest.

The Draft RMB Investment Circular offers foreign businesses more ways to use their offshore RMB funds. If enacted, the circular will likely also accelerate internationalization of the RMB as a currency for settling transactions around the world.

Legitimacy of Offshore RMB for FDI Projects

The Draft RMB Investment Circular defines "cross-border RMB investment" as direct investment in a Chinese company by a foreign investor in accordance with PRC law, using offshore RMB funds legitimately obtained by the foreign investor.

Under the draft circular, in order to satisfy legitimacy requirements and be used for FDI, offshore RMB funds may come from any of a number of sources:

• Offshore sources. RMB funds that are legally obtained abroad by foreign investors, including, without limitation:
  i) RMB-denominated payments for cross-border import and export transactions; and
  ii) Proceeds from offshore issuance of RMB denominated bonds or shares
  
  
• 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 repatriated abroad by the foreign investors;
  ii) RMB payments received by the foreign investors from transfers of their equity/share holdings in such FIEs;
  iii) RMB repayments resulting from a reduction in the registered capital of an FIE, or proceeds from liquidation of the FIE's assets; and
  iv) Investment in a cooperative joint venture FIE that is recouped by the foreign investor ahead of the Chinese investors

Allowable Areas for Investment

In accordance with the Draft RMB Investment Circular, FDI projects and FIEs' reinvestments using offshore RMB funds must, where applicable, comply with PRC laws and regulations regarding FIEs, foreign investment guidelines, state policies, requirements for anti-trust review, and relevant provisions on national security review of any mergers and acquisitions by foreign investors.

The Draft RMB Investment Circular expressly prohibits foreign investors from using offshore RMB funds, either directly or indirectly, to purchase securities listed on a PRC stock exchange, purchase domestic financial derivatives, provide entrustment loans, or repay loans from a domestic or offshore lender. Investments in real estate development projects with offshore RMB are permitted, but the investor must comply with current approval and filing requirements applicable to foreign-invested real estate development projects, and any approved projects must be filed or announced on MOFCOM's website.

Approval Procedures and Supporting Documents

The Draft RMB Investment Circular empowers local MOFCOM counterparts to review and approve any applications for using offshore RMB funds for FDI projects in accordance with applicable FDI-related laws and regulations. An application is subject to central MOFCOM review and approval in any of the following circumstances:

• The registered capital contribution of the project amounts to RMB300 million or more;
• The investment is in financial securities, financial leases, micro-credits, or an auctioneer business;
• The RMB funds are being used to invest in an investment company, a foreign-invested venture capital firm, or private equity enterprise; or
• The investment is in an industry subject to macro-economic regulatory adjustments and controls (i.e., cement, iron, steel, or electrolytic aluminum production, or ship building).

A foreign investor applying for approval of an FDI project using offshore RMB must submit the following documents, in addition to such other documents as may generally be required for an FDI project application:

• Evidence that the offshore RMB funds come from a legitimate source or sources;
• A statement about how such funds will be used; and
• A letter asserting that the foreign investor will not invest such funds in the prohibited areas described above

Conclusion

If enacted, the Draft RMB Investment Circular will permit foreign investors to use their offshore RMB funds for FDI purposes in a manner similar to what they can already do with their RMB profits generated and retained inside China. However, the full implementation of the circular will require further action by other Chinese governmental agencies, such as the State Administration of Foreign Exchange, the primary regulator of foreign exchange matters in China.