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China: New Rules on Foreign Direct Investment with Renminbi

(Dec. 22, 2011) Foreign investors, including those from Hong Kong, Taiwan, and Macao, are now officially allowed to make direct investments in mainland China with offshore renminbi (RMB, Chinese yuan) funds. Although a pilot program of RMB settlement for cross-border trade had been launched in 2009, Chinese regulators recently issued the following two rules to formally allow cross-border direct investment with RMB:

· Ministry of Commerce (MOFCOM), Circular on Issues Relevant to Cross-border Direct Investment with Renminbi (Text of the MOFCOM Circular [in Chinese], Shang Zi Han [2011] No.889 (Oct. 12, 2011), Central People's Government of the People's Republic of China website); and

· People's Bank of China (PBOC), Measures for the Administration of Renminbi Settlement Matters Relating to Foreign Direct Investment (Text of the PBOC Measures [in Chinese], PBOC Announcement [2011] No. 23 (Oct. 13, 2011), the PBOC website.)

The MOFCOM Circular

According to the MOFCOM Circular, “cross-border direct investment with RMB” refers to “activity whereby a foreign investor invests directly in China in accordance with the law with lawfully obtained offshore RMB.” (MOFCOM Circular, art. 1.) “Offshore RMB” includes the RMB obtained by a foreign investor through cross-border trade settlement in RMB and RMB lawfully obtained in China and remitted abroad as RMB profit or as the result of an equity transfer, capital reduction, liquidation, or early recovery of investment. (Id. art. 2.) The RMB a foreign investor lawfully obtained abroad through legal means include, but are not limited to, the RMB obtained through RMB-denominated bonds or shares issued abroad, the Circular said. (Id.)

The RMB investment is still subject to the country's policies towards foreign investment industries, the national security check, and the anti-monopoly review. (Id. art. 3.) The MOFCOM and its local counterparts are empowered to review and approve applications to use offshore RMB for foreign direct investment (FDI) projects that fall within the scope of their respective authority. (Id. art. 5.)

The PBOC Measures

The PBOC Measures, issued one day after the issuance of the MOFCOM Circular, further specify the rules banks will use to process RMB settlement for FDI in China using offshore RMB.

According to the PBOC Measures, a foreign investor may, in accordance with provisions for the administration of bank settlement accounts, apply to open “RMB settlement accounts for a foreign institution,” in order to carry out the procedures for RMB settlement. (PBOC Measures, art. 5.) Under the principle of the “dedicated use of dedicated accounts,” a foreign investor will open a “dedicated deposit account for RMB startup costs,” to be used to pay for startup expenses relating to the investment project, and a separate “dedicated deposit account for RMB reinvestment” in which to deposit RMB funds derived from profit distribution, liquidation, capital reduction, equity transfer, early recovery, etc., that are to be used for reinvestment within China. (Id.)

A newly-established foreign-invested enterprise (FIE), as well an FIE established as the result of a merger or acquisition, must apply for registration to a branch of the PBOC at the place where it is registered. (PBOC Measures, art. 7.) The FIE must then apply to open RMB settlement accounts. (Id. art. 8.) A dedicated RMB capital deposit account will be opened for deposit of the RMB capital funds remitted by the foreign investor. (Id.)

The new rules are expected to boost Hong Kong's status as an offshore RMB center. It was reported that up to December 14, 2011, 74 projects using cross-border direct investment in RMB had been approved, with a total amount of about RMB16.5 billion (about US$2.59 billion); over 70% of the investments were made through Hong Kong. (74 Cross-Border Direct Investment Projects Approved [in Chinese] Information Services Department of Hong Kong website (Dec. 14, 2011).)