November 01, 2011

Circular on Issues Concerning Cross-Border RMB Direct Investment

Issuing Body: Ministry of Commerce
Issuing Date: October 13, 2011
Effective Date: October 13, 2011

The Ministry of Commerce (MOFCOM) has finalized rules permitting foreign investors to use RMB funds legitimately obtained outside China to make direct investments inside the country, with some restrictions. MOFCOM, the primary regulator of foreign-direct investment (FDI) matters in China, released the Circular on Issues Concerning Cross-Border RMB Direct Investment (Final RMB Investment Circular) on October 13, 2011, less than eight weeks after it issued a draft version of the rules for public comment. The new rules took effect immediately, on the same day as the Administrative Measures on Renminbi Settlement for Foreign Direct Investment, which were enacted by the People's Bank of China (PBOC) and are also summarized in this month's China Law Update.

Most of the changes made to the draft version of the circular, which was summarized in the October 2011 China Law Update, are minor. The final rules are somewhat more liberal than the draft rules, in that they allow foreign investors to use offshore RMB to repay loans and to acquire and transfer stock shares under limited circumstances. The final version also incorporates some procedural and administrative changes.


China has allowed the limited use of RMB to settle cross-border trades since July 2009, under the umbrella of the People's Bank of China's Administrative Measures on a Pilot Program for Renminbi Cross-Border Trade Settlement. Those rules allowed certain qualified domestic enterprises (subject to the recommendation of local governments and PBOC approval) to settle import and export transactions with foreign companies in RMB, with the foreign company obtaining and holding the RMB offshore. Compared to transactions settled in foreign currency, trades settled in RMB involve simpler import/export procedures and enable transaction parties to avoid foreign exchange risks.

The Chinese government first introduced the pilot scheme in five large cities, including Shanghai, in 2009. It initially allowed qualified onshore firms to use RMB to settle cross-border transactions only in Hong Kong and Macau. When the pilot program succeeded, the PRC government expanded the program throughout China, with onshore firms being allowed to use RMB to settle transactions around the world.

According to Chinese government statistics, in 2010 the total amount of RMB used in cross-border settlements was 506.7 billion. Because the RMB is not a freely convertible currency, however, some foreign businesses outside China have been accumulating large amounts of it, which they could not freely spend or invest. The Final RMB Investment Circular offers foreign businesses significantly more ways to use their offshore RMB funds.

Legitimacy of Offshore RMB for FDI Projects

As used in the Final RMB Investment Circular, "cross-border RMB investment" refers to direct investment in a Chinese company by a foreign investor in accordance with PRC law using offshore RMB funds legitimately obtained by the foreign investor.

As under the draft circular, the foreign investor's offshore RMB funds may come from any of a number of sources in order to be deemed legitimate for FDI projects:

  • Offshore sources. RMB funds that are legally obtained abroad by foreign investors, including, without limitation:

    i) RMB-denominated payments for cross-border import and export transactions; and

    ii) proceeds from offshore issuance of RMB-denominated bonds or shares.

  • Onshore sources. RMB funds received by foreign investors from domestic foreign-invested enterprises (FIEs) in which they have invested, including:

    i) profits distributed in RMB by an FIE and repatriated abroad by the foreign investors;

    ii) RMB payments received by the foreign investors from transfers of their equity/share holdings in such FIEs;

    iii) RMB repayments resulting from a reduction in the registered capital of an FIE, or proceeds from liquidation of the FIE's assets; and

    iv) investment in a cooperative joint venture FIE that is recouped by the foreign investor ahead of Chinese investors.

Allowable Areas for Investment

The Final RMB Investment Circular broadly allows foreign investors to use offshore RMB funds for a variety of investment or reinvestment purposes, so long as they are otherwise legal. FDI projects and reinvestments by a foreign-invested enterprise must, where applicable, comply with PRC laws and regulations regarding FIEs, foreign investment guidelines, state policies, requirements for anti-trust review, and relevant provisions on national security review of any merger or acquisition by a foreign investor or investors.

In its draft form, the MOFCOM circular expressly prohibited foreign investors from using offshore RMB funds, either directly or indirectly, to purchase securities listed on a PRC stock exchange, to purchase domestic financial derivatives, to provide entrustment loans, or to repay loans from a domestic or offshore lender. The Final RMB Investment Circular slightly liberalizes these rules, permitting foreign investors to use offshore RMB to participate in the directed issuance of shares of domestically listed companies and the transfer of shares thereof through agreement. Under such circumstances, a foreign investor must go through relevant examination and approval procedures with MOFCOM in accordance with the requirements for foreign strategic investors in domestically listed companies.

Additionally, the prohibition on repayment of loans from domestic or offshore lenders is removed from the Final RMB Investment Circular, meaning that foreign investors are allowed to use offshore RMB to repay loans.

Approval Procedures and Supporting Documents

Approval procedures and supporting documents mostly remain the same as in the draft version of the circular. In the Final RMB Investment Circular, local MOFCOM counterparts are empowered to review and approve applications to use offshore RMB funds for FDI projects in accordance with applicable FDI-related laws and regulations in that jurisdiction. An application is subject to central MOFCOM review and approval in any of the following circumstances:

  • The registered capital contribution of the project amounts to RMB300 million or more;
  • The investment is in financial securities, financial leases, micro-credits, or an auctioneer business;
  • The RMB funds are being used to invest in an investment company, a foreign-invested venture capital firm, or private equity enterprise; or
  • The investment is in an industry subject to macroeconomic regulatory adjustments and controls (i.e., cement, iron, steel, or electrolytic aluminum production, or ship building).

A foreign investor applying for approval of an FDI project using offshore RMB must submit the following documents, in addition to such other documents as may generally be required for an FDI project application:

  • Evidence that the offshore RMB funds come from a legitimate source or sources;
  • A statement about how such funds will be used; and
  • A standard government form, the Cross Border RMB Direct Investment Registration Form.

The introduction of a standard form is new, as the draft version of the rules required foreign investors to submit a letter asserting that they would not invest offshore RMB funds in prohibited areas described above.

The Final RMB Investment Circular allows MOFCOM or its local counterparts five working days to grant or deny approval of foreign cross-border RMB investments. The final rules also specifically require all levels of MOFCOM to provide timely notice of approval and copies of approval documents to the People's Bank of China, customs, tax authorities, local administrations for industry and commerce, and foreign exchange bureaus at the same level in order to implement normally required FDI procedures. This notification requirement is also new in the final rules.


The Final RMB Investment Circular reflects the Chinese government's desire to encourage foreign investors to invest offshore RMB in China. The People's Bank of China has likewise issued implementing regulations to further facilitate RMB investment. With apparently broad support from authorities in various branches of the government, internationalization of the RMB as a currency for settling transactions around the world—a stated goal of China's government—seems likely to come

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