Focus: Liberalising cross-border investment in RMB
11 January 2012
In brief: The Chinese Government has made further moves towards the internationalisation of its currency with the release of a number of regulations regarding the use of the RMB both in investments made by Chinese companies overseas and, significantly, investments made by overseas companies into the PRC. Special Counsel Ross Keene , Senior Associates Adrian Fisher and Maggie Ma and PRC Consultant Michelle Ding report.
- Overseas direct investment by a PRC entity
- Direct investment into the PRC by foreign investors
How does it affect you?
- Certain foreign investments into the PRC are now able to be settled in RMB.
- Similarly, certain investments by domestic PRC entities outside the PRC are now able to be settled in RMB, and income made through those investments may be repatriated to the PRC in RMB.
- The PRC has recently released regulations relaxing the level of approvals required to settle RMB investments into the PRC, and introducing more certainty as to the processes that companies seeking to invest in the PRC in RMB must follow.
- The purpose of the changes is to provide greater flexibility in the use of the RMB, thereby increasing its use and importance as an international currency.
In July 2009, the PRC Government officially launched a trial regime for cross-border RMB trade settlements in certain pilot regions in the PRC, including Shanghai, Guangzhou and Shenzhen. This, for the first time, enabled PRC companies to settle cross-border trade transactions in RMB.
In a series of subsequent regulations, the PRC Government has expanded the regions to which the program applies, as well as the scope of the program, from trade settlements only to a range of investments both out of and into the PRC. Notably, the following regulations have been promulgated in 2011:
- On 6 January 2011, the PRC's central bank, the People's Bank of China (the PBOC), issued the Measures for the Administration of the Pilot Scheme for Settlement of RMB for Overseas Direct Investment (the measures). The measures allow certain Chinese companies to use RMB when making investments outside the PRC. The measures initially applied only to companies registered in the same pilot regions as identified in the PRC Government's 2009 regulations relating to cross-border RMB trade settlements.
- On 3 June 2011, the PBOC issued the Circular on Clarifying Relevant Issues Regarding Cross-Border RMB Business (Circular 145). Circular 145 provides for the use of RMB by overseas companies seeking to invest into the PRC in certain circumstances.
- On 24 August 2011, the PBOC, along with other PRC authorities including the Ministry of Commerce, issued the Notice on Expanding the Regions for Cross-border RMB Trade Settlement (the notice). The notice expands the list of the pilot regions to which the trial regime for cross-border RMB trade settlements applies, so that the program effectively covers the whole of the PRC.
- On 12 and 13 October 2011 respectively, the Ministry of Commerce and the PBOC issued further regulations that outline a number of procedural and administrative requirements that must be followed when a foreign entity is seeking to settle investments into the PRC in RMB.
We set out below some of the impacts of these regulations.
The measures state that domestic PRC institutions may use RMB to establish or invest in overseas enterprises or projects, provided that they have approval from the competent regulatory authority or authorities, being the Ministry of Commerce and/or the National Development and Reform Commission (the approving authority). The measures apply only to non-financial domestic institutions.
In addition to obtaining the approving authority's approval, under the measures, a domestic institution must apply to the local branch of the State Administration of Foreign Exchange (SAFE) before remitting RMB out of the PRC as part of an overseas direct investment. The measures anticipate that a domestic institution may make any 'initial phase' payments that are part of the investment (in principle, the cumulative 'initial' payments should not exceed 15 per cent of the total investment by the Chinese party) before receiving approval from the approving authority but after receiving SAFE approval. If the domestic institution then fails to receive approval from the approving authority within six months after the date of the remittance in RMB of the 'initial' payments, it must transfer the remaining capital earmarked for the overseas investment back to its domestic RMB account. The measures also place responsibility on the bank to prompt the domestic institution to transfer the remaining capital back to its domestic account if approval is not received within this six-month period.
The measures allow the domestic PRC institution to repatriate income (including dividends or other profits or income from a decrease in equity holding or liquidation) back to the PRC, or to make any further overseas remittances relating to the investment (eg if it decides to increase its investment), on the basis of the approving authority's initial approval.
The domestic institution must, within 30 days, report to SAFE any major changes to the overseas enterprise or project that is the subject of the overseas investment, including where there is a change to the basic information of the enterprise or project (such as its name, business term, joint venture partner and type of joint operating model) or where there has been an increase or decrease in the investment, or any merger, division or liquidation of the enterprise.
The measures also allow a bank to provide a loan in RMB to an overseas enterprise or project in which a domestic institution has invested. If a bank does so, it must report that loan to the local branch of the PBOC within 15 days.
Released in June 2011, Circular 145 sets out the approval procedures and settlement requirements that must be followed for foreign direct investment into China in RMB, which has been implemented to date on a pilot basis under Circular 145 and regulations released earlier in 2011 by the Ministry of Commerce and SAFE.1 The purpose of allowing foreign investment in RMB is to provide a further means by which RMB held by foreign companies offshore can be utilised.
Circular 145 allows foreign investors to invest into the PRC in RMB to establish new onshore companies, make acquisitions (excluding round-trip investments2), increase capital held in existing subsidiaries or make shareholder loans, provided:
- the investment is approved by the local branch of the Ministry of Commerce;
- the settlement is approved by the head office of the PBOC; and
- the project is not a project that is:
- in an industry or business type listed in the 'Restricted' category of the PRC's Foreign Investment Catalogue; or
- 'under the key control of the State' (Circular 145 does not indicate what this phrase means).
The additional measures released by the PBOC on 13 October 2011 (called the Administrative Measures on RMB Settlement Business for Foreign Direct Investment) provide further detail around the requirements for settling investments into the PRC using RMB, and set out administrative procedures for foreign invested enterprises borrowing RMB from foreign sources such as their overseas parent company. Significantly, the measures also relax the approvals required for some RMB settlements. Foreign investors may now apply for RMB settlement accounts in the PRC without the need to seek PBOC approval.
On 12 October 2011, the Ministry of Commerce released the Notice of the Ministry of Commerce on Issues Relating to RMB Foreign Direct Investment. These new regulations relate to foreign investment into China in RMB only (and not other forms of cross-border trade, including by way of loan), and require that all such investments be approved by the Ministry of Commerce. Depending on the size and nature of the investment, approval may ultimately need to be given by the Ministry of Commerce at the national level. For example, if the investment is valued at RMB 300 million or more or the investment is in certain industries, such as cement, iron or steel, or is undertaken by a venture capital or private equity firm, approval will be required at the national level.
Given the developments discussed above, Chinese authorities have given a clear signal to domestic and foreign investors that cross-border RMB investment will be promoted in the future.
However, while it is clear that the PRC authorities have set the course for the further liberalisation of foreign investment into the PRC using RMB, the laws and regulations regarding the internationalisation of RMB in the PRC are still at an early stage and in a constant state of flux. The most recent set of regulations released by the PBOC and the Ministry of Commerce ease the levels of approval required for RMB settlements and provide further clarity as to the processes companies must follow when investing into the PRC in RMB. We expect that further regulations will be released in the coming months.
The recent changes are part of broad moves by the PRC authorities to promote gradually the RMB as an international currency, which will in turn strengthen the PRC's role in international financial markets.
- See the Notice of the Ministry of Commerce on Issues Concerning the Administration of Foreign Investment of 25 February 2011 and the Notice of the General Affairs Department of the State Administration of Foreign Exchange on Issues Related to the Standardization of the Business Operations of Cross Border Renminbi Capital Account Items of 7 April 2011.
- This term refers to an inbound investment by an offshore investment vehicle directly or indirectly owned or controlled by a PRC domestic institution or individual.
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