Name: PBOC Circular on Relevant Issues regarding Cross-Border RMB Business (中国人民银行关于明确跨境人民币业务相关问题的通知) (“Circular”)
Issuing authority: People’s Bank of China (“PBOC”)
Effective date: 03 June 2011
Subject: Cross-border RMB settlement, RMB inbound direct investment, RMB debt
Following the issuance of the pilot rules on RMB settlement of outbound direct investments in January 2011, the PBOC has now issued new rules relating to cross-border RMB business. The Circular sets out the application process for foreign direct investment in RMB with a view to meeting the growing demand for RMB direct investments by foreign institutions. This is regarded as another significant step forward towards the internationalisation of RMB. The Circular also clarifies certain issues relating to RMB debt owed by onshore entities to offshore entities. Whilst not expressly stated as such under the Circular, it appears that currently the eligible onshore entities which are allowed to receive RMB proceeds from RMB direct investment are limited to the entities in the 20 pilot provinces and cities participating in RMB settlement in cross-border trades.
Highlights
RMB foreign direct investment and RMB shareholder loan
- Whilst there have been quite a few precedent cases in practice, foreign investors are now expressly allowed by the Circular to use RMB proceeds raised from legitimate sources (e.g. issue of RMB bonds in Hong Kong or an RMB denominated loan drawn in Hong Kong) to make investments into the PRC by way of greenfield establishment of a foreign invested enterprise, acquisition of or merger with a PRC enterprise (excluding “round-trip” investment, i.e. investment by PRC residents into the PRC via an offshore special purpose vehicle), acquisition of an equity interest in an existing PRC entity or provision of a shareholder loan to a PRC entity.
- Cross-border RMB settlement with respect to foreign direct investment is still at the trial stage and requires approvals from the PBOC and the Ministry of Commerce (“MOC”). Any application for approval will be reviewed by the authorities on a case-by-case basis. Currently, the PBOC will not grant approval for industries falling within the “prohibited” or “restricted” categories (such as the real estate and financial industries).
- The application for PBOC approval must be submitted to the local branch of the PBOC by a local bank (which includes PRC and foreign invested banks) designated by the onshore recipient which will be receiving the RMB proceeds. As part of the application documents submitted to the local branch of the PBOC, the local bank is required to submit the approval of the MOC, or its local counterpart. The local branch of the PBOC will conduct a preliminary review of the application and will then submit the application to the central PBOC for final approval. An RMB cross-border business filing notification will be issued by the local PBOC branch to the local bank if the application is approved by the central PBOC. The local bank can then open an RMB settlement account for the onshore recipient for the proposed RMB inbound investment and can receive the RMB proceeds.
- The local bank is required to monitor usage of the RMB proceeds remitted into the PRC to ensure that it is within the approved business scope of the onshore recipient.
RMB debt owed by onshore entities to offshore entities
- The Circular also clarifies that the following types of RMB debt owed by onshore entities to offshore entities will not be deemed to be foreign debt and therefore will not be subject to foreign debt control under the current regulatory regime:
- RMB debt owed by onshore entities to offshore entities in relation to RMB settlement in cross-border trades (such as a long term letter of credit or an advance or deferred payment);
- RMB guarantees provided by onshore banks in favour of offshore entities; and
- the outstanding RMB balance in an RMB settlement account opened by an offshore entity with an onshore bank.
- However, it is not entirely clear whether other types of RMB debt owed by onshore entities to offshore entities would be regulated as foreign debt or not.
If you would like to discuss anything regarding this Alert please contact Fang Jian (Shanghai), William Liu (Shanghai), Richard Gu (Shanghai), or Thomas Ng (Beijing).
