On June 3, 2011, the People’s Bank of China (“PBOC”) promulgated a Circular on Clarifying Certain Issues Relating to Cross-Border RMB Services (“Circular”).
According to the Circular, so long as banks follow certain procedures to report their provision of RMB settlement services (“Services”) to the RMB Cross-border Receipt and Payment Information Management System, they may provide Services for cross-border trade, current accounts, offshore direct investment, offshore lending and any other cross-border RMB settlement service as approved by the PBOC. The Circular also specifies additional requirements to be met in order for foreign direct investment (“FDI”) to obtain Services and for foreign participation banks to provide Services.
RMB Settlement Services for FDI
Further to the various provincial trial programs launched earlier this year, the Circular sets out the country wide uniform Services approval process specific to FDI, emphasizing that Service for FDI is still in its trial period and is therefore subject to case-by-case PBOC approval.
The approval process requires that a foreign enterprise first obtain the certificate of approval in respect of its investment from the Ministry of Commerce (“MOFCOM”). The foreign enterprise will then ask their onshore settlement bank to submit an application for Services to a local PBOC branch office. If an application is approved by the local branch office, it will then be sent to the PBOC head office for review and final approval.
The approval requirements apply to merger and acquisition of domestic, onshore enterprises (excluding round-trip investment), establishment of new foreign-owned enterprises, equity transfers, capital increases and shareholder loans. The Circular notes that the PBOC does not accept applications for Services for FDI in “restricted” industries or sectors “regulated by policy”.
Foreign Participation Banks
The Circular stipulates that both onshore settlement banks and foreign participation banks may only engage in providing Services for transactions involving genuine cross-border RMB trade.
Foreign participation banks may only provide Services: (1) for transactions involving an onshore enterprise (as either direct payee or payer); (2) to enterprises that have real need for trade payment within three months. An enterprise which has obtained Services from a foreign participation bank must complete any subsequent related trade payment with that same bank.
Foreign participation banks are required to track clients’ cash flow after providing Services, apply strict scrutiny to new clients and transactions in high amounts, and monitor any unusual transactions.