China Issues New Rules to Allow RMB Denominated Foreign Investment

October 19, 2011



New measures in China will allow foreign investors to invest directly in China with Renminbi (RMB) lawfully obtained overseas. The measures represent another significant step towards the liberalization and full convertibility of Renminbi (RMB) as they widen the channel for offshore RMB to flow into China. They also are expected to further promote the development of the offshore RMB bond and financing markets particularly in Hong Kong.

These developments are contained in the Ministry of Commerce (MOFCOM) and the People’s Bank of China (PBOC)’s Circular on Cross-border Renminbi Foreign Direct Investment (the “MOFCOM Circular”) of October 12, 2011 and the Measures on Administration of Renminbi Settlement regarding Foreign Direct Investment (the “PBOC Measures”) of October 13, 2011.

Although foreign direct investment in RMB was not entirely prohibited previously, it required reviews and approvals from MOFCOM and PBOC (both at the central government level), which was generally perceived as painfully lengthy and unpredictable. These new regulations “provide transparency and certainty for the related procedures in making foreign direct investments in Renminbi”, as commented by Hong Kong Financial Secretary John Tsang. Offshore RMB now can flow back into China either by way of cross-border trade settlement or direct investment. However portfolio investments in securities markets remain largely closed to foreign investors except for a limited number of qualified foreign institutional investors (QFII) who have successfully obtained a quota for securities trading from the State Administration of Foreign Exchange (SAFE).

Sources of RMB and Restrictions on Permitted Investments

The MOFCOM Circular states that foreign investors may only invest offshore RMB funds raised from “legitimate sources”, which are defined to include:

  • cross-border trade settlements; 
  • dividend distributions, disposal of equity interests, reduction of registered capital or liquidation of a foreign invested enterprise (FIE); and 
  • RMB funds raised lawfully outside of China, including issuances of offshore RMB bonds or other RMB denominated securities.

The MOFCOM Circular also provides that offshore RMB cannot be used, directly or indirectly, in China to invest in securities or financial derivatives or for the purpose of entrustment loans (inter-company loans are generally structured to be entrustment loans via a bank due to restrictions on inter-company loans in China). The prohibition on securities trading, however, does not apply to strategic investments by foreign investors in Chinese listed companies where securities of listed companies are sold to foreign investors privately and not through public markets.

MOFCOM Approval

Foreign direct investments made in RMB, as with foreign hard currencies such as US or HK dollars, are now subject to the same rules and regulations governing foreign direct investments, including approvals by MOFCOM or its local counterparts, ownership restrictions for certain industries and national security and merger control reviews.

The current regulations governing approval power allocation between central MOFCOM and its local counterparts will also apply to foreign direct investment in RMB. Depending on industry sector and size of investment (as measured by committed total investment amount), investments in RMB may qualify for approval by local counterparts of MOFCOM. Central MOFCOM approval is required for foreign direct investments in RMB if such investments:

  • equal or exceed RMB300 million; 
  • are made into certain financing industry sectors including guarantees, leasing, credit loans or auctions; 
  • involve investments in foreign invested holding companies, foreign invested venture capital enterprises, or foreign invested equity investment fund enterprises; or 
  • involve investments in any sector subject to national macro-control policies, such as cement, iron and steel, electrolytic aluminum and ship-building.

PBOC Registration and Control on RMB Accounts

PBOC approval is no longer required for foreign direct investments in RMB in accordance with the PBOC Measures. Instead, PBOC requires FIEs with RMB investments to be registered with its local PBOC branch.

PBOC also requires that the RMB capital contribution made by a foreign investor be deposited in a special set of bank accounts, similar to the requirement imposed by SAFE on capital contribution in a foreign currency. For example, RMB capital contributions must be deposited into a “RMB Account Exclusively for Registered Capital” opened in the name of the FIE. The account bank also is required to review all relevant documents to verify such RMB capital contribution on behalf of PBOC. The RMB funds deposited in such account can only be wired into a settlement account of the FIE after all required capital verification procedures are completed.

RMB-denominated Shareholder Loans

The PBOC Measures also appear to permit an FIE to receive loans denominated in RMB from its foreign shareholders, offshore affiliates or offshore financial institutions, provided that it has sufficient foreign debt quota (which is generally the difference between the total investment amount and the registered capital of such FIE). This is encouraging news for those foreign investors who are reluctant to expose themselves to cash trap risks in China. However, as this provision still requires implementation by SAFE, it remains to be seen whether SAFE will interpret the PBOC Measures to expressly permit foreign invested enterprises to borrow RMB-denominated shareholder loans.

It is important to note that these new regulations have not clarified all issues that may concern foreign investors. For example, it is not clear whether the RMB registered capital of FIEs can be used to make equity investments in China. Currently under a SAFE circular dated August 21, 2008 (known as Circular 142), registered capital denominated in foreign exchange generally cannot be converted by FIEs into RMB and used to make equity investments in China. Presumably, registered capital denominated in RMB doesn’t have currency conversion issues and thus is not subject to Circular 142, however SAFE may view this as circumventing the intention of Circular 142.

O’Melveny & Myers will continue to closely to monitor all developments.


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