China has finally opened the door to allow foreign investors to make use of their offshore RMB for investments into China. On 12 October 2011, the Ministry of Commerce (MOFCOM) promulgated the long-awaited Notice for Relevant Issues concerning Cross-border RMB Direct Investments, and on the following day, the People's Bank of China (PBOC) also promulgated the Administrative Measures of RMB Settlement Operations for Foreign Direct Investments. Both regulations came into force on the date of promulgation.
According to the MOFCOM Notice, when applying for approval for offshore RMB investment, foreign investors must produce evidence that their offshore RMB is lawfully sourced from any of the following channels:
- cross-border trading
- profits distribution, share sale, capital reduction or liquidation in relation to any existing foreign invested enterprise (FIE)
- issue of RMB denominated bonds (e.g., Dimsum Bonds)
- issue of RMB denominated shares.
Approval is required from MOFCOM directly (rather than from a local MOFCOM office) if the FIE to be invested with offshore RMB:
- has registered capital of no less than RMB300 million
- carries on the business of finance guarantee, finance lease, microfinance or auction
- is a foreign invested holding company, venture investment company or equity investment company
- is in a regulated industry such as manufacturing of cement, steel, electrolytic aluminium or shipbuilding.
The MOFCOM Notice also stresses that offshore RMB for foreign investment purposes must not be used to trade securities or financial derivative products, or be provided as entrusted loans in China.
The PBOC Measures, on the other hand, set out specific procedures for the opening of various special RMB bank accounts to receive offshore RMB. In particular:
- where a new FIE is established by a foreign investor, the FIE can open a special capital deposit account to receive offshore RMB as capital contribution by the foreign investor
- where a domestic company is acquired by a foreign investor, the Chinese shareholder of the domestic company can open a special M&A deposit account to receive offshore RMB to be paid by the foreign investor as consideration for the acquisition
- where a Chinese shareholder sells its shares in an existing FIE to a foreign investor, the Chinese shareholder can open a special share transfer deposit account to receive offshore RMB to be paid by the foreign investor as consideration for the share transfer.
With the implementation of the two new regulations, foreign investors now have more choices to make use of their offshore RMB deposits.
This is especially important for investors in Hong Kong, the world's sole offshore RMB centre, with a projection of more than RMB1 trillion deposits by the end of 2011.