In a move to further promote settlements of cross-border trade and investment in renminbi (RMB), the People's Bank of China (PBOC) released regulations on October 13, 2011—The Measures on Administering RMB Settlement in Relation to Foreign Direct Investment (the PBOC Rules), governing foreign direct investments in China using RMB that has been legally obtained outside of China (RMB FDI). The PBOC Rules permit foreign invested entities (FIEs) to invest RMB into China for any "lawful purpose," and encompass various aspects of RMB FDI, with specific provisions regarding RMB-denominated cross-border loans, capital injections, purchase price payments with respect to the acquisition of Chinese companies and repatriation of dividends. China's Ministry of Commerce (MOFCOM) also issued a circular, effective October 12, 2011—The Notices on Certain Issues Relating to Cross-border RMB Foreign Direct Investment, that clarifies certain issues in relation to cross-border RMB FDI transactions.
Set forth below are key points under the PBOC Rules and the MOFCOM Circular:
Regulatory Authority for RMB FDI Transactions
MOFCOM and its local counterparts have been designated as the regulatory authority for RMB FDI transactions, including projects by FIEs, requests for capital increases of FIE and Chinese domestic companies, and the acquisition and disposition of Chinese companies. MOFCOM's local counterparts at the city/municipal level are authorized to approve most RMB FDI transactions. However, MOFCOM must give preliminary approval at the provincial level and final approval at the national level if the capital contribution is equal to or greater than RMB300 million and/or if the transaction involves an investment in certain types of businesses, company structures or commercial sectors, including guarantee companies, financial leasing companies, micro-finance companies, foreign-invested holding companies, venture capital / equity investment enterprises and other politically sensitive sectors.
The PBOC Rules require FIEs to register each RMB FDI transaction with the local branch of the PBOC following the completion of the transaction, and to establish special bank accounts in connection with account control procedures relating to offshore RMB.
The PBOC Rules provide that FIEs may invest RMB into China for any "lawful purpose." The scope of "lawful purpose" is not defined, but the general understanding is that offshore RMB could be used to invest in any industry or sector, and for any purpose not expressly prohibited. The MOFCOM Circular provides some clarity by simply stating that offshore RMB may not be used to invest in securities, financial derivatives or in connection with entrustment loans. According to the PBOC Rules, offshore RMB received by FIEs must be deposited into specific types of RMB deposit accounts depending on the intended purposes of the funds, as more specifically set forth in the PBOC's Measures for the Administration of RMB Bank Settlement Accounts and other applicable rules.
PBOC Rules appear to permit FIEs to incur debt in the form of offshore RMB loans from a foreign parent, a foreign affiliate and/or any foreign financial institution, provided that the FIE has sufficient foreign debt quota (foreign debt quota is the difference between the total investment of the company reported to the regulatory authorities and the FIE's actual paid-in capital). Investors hoping to borrow offshore RMB should note that the PBOC Rules specify that offshore RMB loans will be considered "foreign debt" and will be counted against the foreign debt quota. As such, FIEs with offshore RMB loans are required to register the underlying loan agreements with China's State Administration of Foreign Exchange (SAFE). However, pursuant to Circular 130,1 SAFE will not process an application to register foreign debt or otherwise approve a conversion of foreign debt for a real estate FIE unless the FIE, prior to June 1, 2007, obtained and filed with MOFCOM an approval certificate from the relevant governmental authorities. Without SAFE registration, the underlying contract for the foreign debt (i.e., the loan or shareholder loan agreement) is unenforceable in China, and SAFE will not permit the offshore RMB to be remitted to the FIE's bank account in China.2
Although the PBOC Rules permit FIEs to incur debt denominated in offshore RMB, the rules do not alter or supersede existing regulations relating to FIEs in certain industries/sectors. In the tightly regulated real estate sector, the PBOC Rules do not change the fact that FIEs can only borrow offshore RMB if they meet the criteria set forth under existing regulations. These criteria include the following:
- The registered capital of the real estate FIE has been fully paid-in.
- The real estate FIE has obtained the relevant land use rights certificate.
- No less than 35 percent of the total project investment amount has been paid as project development capital.
- If the total investment amount of the real estate FIE is equal to or greater than US$10 million, its registered capital must be at least 50 percent of the total investment amount. 3
- The real estate FIE has sufficient foreign debt quota.4
- The foreign debt (i.e., the offshore RMB loan) of the real estate FIE has been, or is able to be, registered with SAFE.
The PBOC Rules and the MOFCOM Circular are another step forward in China's march toward internationalizing the RMB. The new rules should certainly come as good news to companies that have issued, or contemplate issuing, RMB bonds in Hong Kong, as the investment channels for offshore RMB funds are increasingly clear. We expect that the relevant governmental authorities will issue additional guidance regarding other aspects of RMB FDI: namely, whether FIEs, regardless of the currency in which their original capital contribution or foreign debt was denominated, may make dividend distributions and/or pay liquidation proceeds in RMB.