To further encourage foreign investments into the PRC, the Ministry of Commerce published a Circular extending the cross border use of Renminbi (“RMB”) for direct investments into PRC (Shang Zi Han [2011] Number 889) (the “Circular”) on 12 October 2011. Pursuant to the Circular, foreign investors are now allowed to use RMB proceeds legally obtained overseas for investments into PRC. The Circular is also applicable to Hong Kong, Macau and Taiwan investors.
In view of the increasing amount of RMB circulated outside PRC, the PRC government has been introducing new measures for the use of RMB in international trade and outbound investments since 2009. As RMB is still not a freely convertible currency, foreign direct investments by way of capital contributions in newly established companies in PRC or by way of acquisition of assets or equity interests in PRC companies can only up to now be made in foreign currencies. The Circular is an important step to internationalize RMB and enable more diversified use of offshore RMB proceeds.
1. Definition of Offshore RMB
The source of offshore RMB proceeds (“Offshore RMB”) which can be used for foreign direct investments into PRC are set out in paragraph 2 of the Circular as follows :-
(a) RMB proceeds obtained through cross border trade settlement in RMB by foreign investors, and the proceeds from profits, share conversion, reduction of capital, liquidation and early recovery of investments legally received by foreign investors in the PRC and are subsequently remitted overseas; and
(b) RMB proceeds received by foreign investors offshore through legitimate means, including but not limited to RMB proceeds arising from the issue of RMB denominated bonds and shares denominated in RMB overseas etc.
2. Foreign Direct Investment Funded by Offshore RMB
In relation to investment and re-investment by foreign invested enterprises funded by Offshore RMB, the Circular has emphasized the importance of complying with the relevant laws, regulations and policies on foreign investment for different industries in the PRC, in addition to other scrutinies such as security review for mergers and acquisitions and anti-trust review.
The existing approval by the Ministry of Commerce and its provincial offices (including approval thresholds) for foreign investments will be equally applicable to those using Offshore RMB. In addition, the following documents should be filed with the authorities pursuant to paragraph 5 of the Circular :-
(a) Evidence of the source(s) of Offshore RMB and explanatory documents;
(b) An explanation on the application of Offshore RMB (in PRC); and
(c) “Situation of Cross Border RMB Direct Investment Form”.
3. Limitations
Paragraph 4 of the Circular expressly prohibits the use of Offshore RMB in the investment of marketable securities and derivative products and entrusted loan, directly or indirectly. However, the restrictions are not applicable to the use of Offshore RMB to subscribe for shares issued by PRC domestic listed companies and transfer of public shares by agreement. The latter investments are subject to the approval of the Ministry of Commerce under the Management Measures of Strategic Investment in Listed Companies by Foreign Investors (paragraph 11 of the Circular).
For the use of Offshore RMB in the following scenarios, the approvals of the provincial Department of Commerce together with the Ministry of Commerce are required (paragraph 6 of the Circular) :-
(a) Contribution of registered capital in RMB of RMB 300 million or more;
(b) Companies in the industries of guarantee financing, lease financing, micro finance lenders and auction houses etc;
(c) Foreign investment companies, foreign invested venture capital enterprises or foreign invested equity investment management enterprises; and
(d) Industries under macroeconomic control of the state such as cement, steel, aluminum and ship-building.
To apply for use of Offshore RMB for investments in the real estate industry, the Circular provides that the current procedures and regulations for foreign investments in the real estate sector are applicable. However, according to the People’s Bank of China’s Circular dated 3 June 2011 for Clarification of Issues Relating to Cross Border RMB Business (Circular 145), application for the use of Offshore RMB in investments in heavily controlled and regulated sectors will not be entertained and the real estate sector is known to be one of these sectors. Therefore, it remains to be clarified if Offshore RMB can be used for real estate investments in PRC.
The Circular has provided the long awaited guidance and clarification on the use of Offshore RMB in foreign direct investments into China. However, further clarifications by other authorities are expected as many areas remain not clear at this stage.
If you have any questions of the above or other issues on foreign direct investments, joint ventures, mergers and acquisitions or doing business in Mainland China, experienced lawyers in our China Business Department will be happy to assist you.