Foreign companies that hold RMB deposits outside of China can now use those offshore RMB amounts for foreign direct investments ("FDIs") into China. This new development follows the trend of the gradual internationalisation of the RMB. It will also further promote the development of the offshore RMB bond and financing markets, especially in Hong Kong.

Use of offshore RMB in FDI transactions

The internationalisation of the RMB can result in foreign companies holding surplus offshore RMB deposits. 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 considered lengthy and unpredictable. The Chinese government has recently implemented new regulations to improve this process.

Under a circular of the Ministry of Commerce ("MOFCOM") dated 12 October 2011 (the "Circular") and a further regulation by the PBOC dated 13 October 2011 (the "Regulation") non-financial foreign investors can now transfer RMB funds back into China that they have legally obtained offshore.

According to the Circular "legally obtained offshore" includes RMB obtained offshore as a result of:

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

There are, however, some limitations to the use of offshore RMB for FDIs.  According to the Circular, FDIs in RMB are prohibited in negotiable securities and financial derivatives. Also, foreign investors cannot use overseas-obtained RMB to provide entrusted loans or to repay domestic or overseas loans. The prohibition on securities trading, however, does not apply to strategic investments by foreign investors in Chinese listed companies through participating in private placements and equity transfers by agreement.

MOFCOM Approvals

FDIs in RMB are now subject to the same approvals as FDIs in foreign currencies, such as US dollars. In addition, the same ownership restrictions for certain industries apply, as does the national security and merger review (see below). As a result the same distinction between central and local MOFCOM will apply for FDIs in RMB as for other investments. According to the Circular, Central MOFCOM approval is therefore required if the investments:

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

According to the PBOC Notice, PBOC approval is no longer required for FDIs in RMB. Instead, the PBOC requires FIEs with RMB investments to be registered with its local PBOC branch.