One Step Forward to Internationalize Renminbi

As the global financial crisis continues, the exchange rate of major international currencies, e.g. the US Dollar and Euro, has experienced significant fluctuations in the recent years. This has brought substantial exchange rate risks to Chinese enterprises conducting business with the rest of the world. On the other hand, as China plays an increasingly important role in the world economy, the Chinese Government also has the intention to internationalize the local currency Renminbi ("RMB").

Starting from July 2009, China had launched a pilot program which allows RMB settlement in cross-border trade. Further, to facilitate cross-border investment, starting from year 2011, the People's Bank of China (the "PBOC"), the Ministry of Commerce (the "MOC") and the State Administration of Foreign Exchange (the "SAFE") promulgated several regulations to officially liberalize the cross-border use of RMB in capital account items, such as outbound investment, inbound investment and cross-border loans.

  1. Use of RMB in Cross-border Current Account Items

Respectively on July 1, 2009 and July 3, 2009, several Chinese government agencies jointly issued the Measures on the Administration of Pilot RMB Settlement in Cross-border Trade (the "Measures") and their Implementing Rules. Under these regulations, selected pilot enterprises located in certain pilot areas could use RMB to settle cross-border trade in goods with enterprises located in certain overseas areas.

Under the July 2009 Measures and their Implementing Rules, 5 cities were chosen as pilot areas. In June 2010, the pilot areas were extended to 20 provinces (cities). Further, in August 2011, the program started to cover all China.

Nowadays, the corresponding overseas areas have been extended to the entire world and the RMB is allowed for settlement not only in cross-border trade in goods but also in service transactions and other current account items.

Pilot enterprises must be recommended by the provincial-level government of the pilot areas and the final list shall be jointly approved by 6 different authorities at the state level. Enterprises qualifying shall normally have a sound compliance record in terms of customs, tax, foreign exchange, etc. According to the PBOC, by the end of 2010, already around 67,000 pilot enterprises had been approved.

  1. Use of RMB in Cross-border Capital Account Items

a)   Outbound Investment         

On January 6, 2011, the PBOC promulgated the Administrative Measures for the Pilot RMB Settlement of Outbound Direct Investment (the "RMB Outbound Investment Measures"), which allow non-financial enterprises to use RMB to establish enterprises aboard and to acquire all or part of ownership, control or management rights of offshore enterprises or projects. In the above context, non-financial enterprises are limited to those incorporated in the areas already participating in the pilot RMB settlement in cross-border trade.

In order for an enterprise to make an outbound investment in RMB, it shall first obtain from the competent authorities in charge of outbound investment, i.e. the State Development and Reform Commission and/or the MOC (or their local counterparts as the case may be), verification on its outbound investment project and the investment amount in RMB. Secondly, the approval from the local SAFE shall be sought. On the basis of the SAFE approval, it may then apply to its RMB settlement account opening bank to effect the RMB payment abroad.

Under the RMB Outbound Investment Measures, subject to the approval of the local SAFE, an enterprise is also allowed to remit front-end expenses for outbound investment in RMB before it has obtained the above-mentioned verification from the competent authorities. However, if such enterprise fails to obtain the verification within 6 months after the remittance, it must repatriate the remaining amount of the funds to its onshore RMB account.     

b)   Inbound Investment       

(1) On February 25, 2011, the MOC issued the Circular on Issues concerning the Administration of Foreign Investment (the "MOC Foreign Investment Circular"). It provides that if a foreign investor intends to establish a new company, subscribe for capital increase of an existing company in the PRC or acquire a domestic company by using its incomes denominated in RMB obtained through cross-border trading settlement or otherwise duly obtained abroad, the approval from the MOC shall be sought.       

(2) Apart from the MOC approval, in accordance with the Circular on Relevant Issues on Regulating the Operational Procedures of Cross-boarder RMB Capital Account Item Business issued by the SAFE on April 7, 2011 (the "SAFE Operational Procedures Circular"), the RMB funds for inbound investment can only be remitted into China after the relevant registration with the local SAFE has been completed.       

(3) Furthermore, under the Circular on Clarifying the Relevant Issues on Cross-border RMB Business issued by the PBOC on June 3, 2011 (the "PBOC Circular"), Chinese banks are only allowed to open the RMB settlement account for such RMB funds after they have received the consent from the PBOC at the central level. The PBOC Circular also states that the consent of the PBOC will not be granted in the case of any foreign investment in restricted industrial sectors and key industries under the State macroeconomic policy.       

(4) In order to clarify the uncertainties on foreign direct investment by using cross-border RMB, the MOC issued the Circular on Several Issues on Direct Investment by Cross-border RMB (Draft Version) (the "Draft Circular") on August 22, 2011 for public comment. Under the Draft Circular, foreign investors may use RMB duly obtained abroad as defined below for investment in China.       

(a) any RMB the foreign investor obtained abroad through legal channels, including but not limited to RMB obtained through cross-border trading settlement, issuance of RMB bonds or stocks abroad, etc.; and  

(b) any RMB the foreign investor obtained through dividend distribution, capital decrease, liquidation or advance recovery of its investment from its foreign invested enterprise(s) in China.

However, such cross-border RMB cannot be used directly or indirectly for investment in securities and financial derivatives, entrustment loans or repayment of domestic and foreign loans.

Furthermore, the Draft Circular intends to delegate the current authority for approval of investment through cross-border RMB from the MOC to its local counterparts in accordance with the current regulations on authority for approval of foreign investment, unless  

(a) the investment amount is RMB 300 million or above;  

(b) the investment will be made in industrial sectors, such as financing security, financial leasing, small amount credit financing and auction;  

(c) the investment will be made in foreign invested holding companies or foreign invested venture capital or equity investment enterprises; or  

(d) the investment will be made in key industries under the state macroeconomic policies, such as cement, steel, electrolytic aluminum and ship-building industries.         

It remains to be seen how fast the MOC will finalize the Draft Circular to clarify the uncertainties on inbound investment by using cross-border RMB and what the final content of the Circular will be.     

c)   Cross-border Loans         

Under the MOC Foreign Investment Circular, subject to the approval by the MOC, a foreign-invested enterprise (the "FIE") may take out RMB loans from its foreign shareholder. In the past FIEs could only take out the loans in foreign exchange currency from abroad.

The RMB loan in the above context is also deemed as foreign debt of the concerned FIE in accordance with the SAFE Operational Procedures Circular and, therefore, shall be registered with the SAFE. In this sense, the total amount of the loans (regardless denominated in RMB or foreign currencies) to be taken out by an FIE from aboard is up to the difference between its total amount of investment and registered capital.

Furthermore, for RMB loans from foreign shareholders, the FIE acting as the borrower does not need to apply to the SAFE for opening a specific foreign debt account in foreign currency. Instead it shall open an RMB settlement account for the RMB loan proceeds with the bank. The latter shall obtain the prior approval form the PBOC at central level for opening such account.

Apart from RMB loans from foreign shareholders, the SAFE Operational Procedures Circular also allows a PRC company to grant RMB loans to its offshore subsidiaries. Before the disbursement of the RMB loan proceeds, the concerned PRC lender shall apply to the competent SAFE for verification of the so-called "Outbound RMB Loan Quota". Within such verified quota, the bank may transfer the loan proceeds from the onshore account of the PRC lender to its offshore subsidiary acting as the borrower.

  1. Prospects

Cross-border RMB settlement under capital account items are currently still subject to the approved by the PRC authorities on a pilot basis. We are aware that in practice not all the local counterparts of the MOC, the SAFE and the PBOC are fully aware of the relevant regulations so far. The detailed approval process and the documentary requirements for use of cross-border RMB under capital account items are still unclear under the current regime and shall be further clarified jointly by the MOC, the SAFE and the PBOC by promulgating more detailed guidelines.