Further to Circular No. 145, on 14 October 2011 PBOC released
new rules on RMB FDI, the Measures on Administration of the RMB
Settlement in relation to Foreign Direct Investment
("PBOC Rules") to roll out PBOC's
detailed management system. The PBOC Rules cover all the FDI
aspects denominated in RMB, including capital injection, payment of
purchase price in the acquisition of PRC companies, repatriation of
dividends and distribution as well as RMB denominated cross-border
loans. The PBOC Rules adopt similar methodology applied by SAFE to
foreign currency FDI but appear to be more friendly. On the same
day, MOFCOM also issued a circular ("MOFCOM
Circular") to clarify certain issues in relation to
cross-border RMB FDI transactions.
We highlight the following aspects we deem of significance:
A. Establishment of an FIE and acquisition of PRC companies by using RMB
MOFCOM takes the role as the regulatory authority to approve RMB FDI transactions, including greenfield FIE project, capital increase or acquisition of PRC companies. The local counterparts are authorized to approve such transactions with the following exceptions which require the preliminary approval by the provincial counterpart of MOFCOM and final blessing of the head office of MOFCOM: (i) the capital contribution is more than RMB 300m; (ii) the transactions involving investment in guarantee companies, finance lease companies, micro-finance companies and auction houses; (iii) the transactions involving investment in foreign-invested holding companies, venture capital or equity investment enterprises; or (iv) the transactions involving investment in iron & steel, electrolytic aluminum, shipbuilding and other policy sensitive sectors.
B. PBOC's approaches to regulate the RMB FDI transactions
RMB Registration: PBOC requires FIEs (newly-established or PRC companies acquired by foreign investors) to conduct a registration with the local branch of PBOC after the completion of the relevant RMB FDI transaction.
Account Control: PBOC sets out the RMB accounts that foreign investors, FIEs and PRC parties selling stake in their companies to foreign investors should open for different types of transactions. The account control system is quite similar to that adopted by SAFE. For example, a foreign investor is free to open a RMB Expense Account (人民币前期费用专用存款账户) to reimburse some expenses before the establishment of an FIE and the balance in such an account can be transferred to the RMB Capital Account (人民币资本金专用存款账户) of the FIE when it is established. If a foreign investor intends to use its RMB proceeds from distribution (dividends or otherwise) by its existing FIE subsidiaries, the foreign investor may open a RMB Re-investment Account (人民币再投资专用账户) to pool the RMB proceeds. Considering its nature being a non-resident account, the SAFE's approval for RMB re-investment may not be required anymore. The PBOC Rules also allow the PRC parties selling stake in their companies to foreign investors to open RMB accounts and receive the purchase price in RMB. This will help resolve the situation where PRC sellers had to open a foreign currency account to receive the purchase price in foreign currency under SAFE Circular No. 142 if they want to sell their companies to foreign investors.
C. Usage of RMB Capital
PBOC Rules provide that all RMB proceeds should be used for any legitimate purpose but keep silent on the specifics. The MOFCOM Circular clarifies that such proceeds may not be used towards investment in securities, financial derivatives or entrustment loans.
D. Entities will benefit from the new rules
The PBOC Rules and MOFCOM Circular clarify that foreign investment in real estate sector may be denominated in RMB although RMB foreign debt remains unavailable to FIEs in this sector. We anticipate that this would incentivize the developers to money via issuing CNH bonds.
It is worth noting that foreign-invested partnership enterprises ("FIP") are also allowed to receive RMB capital contribution from foreign investors and in turn use RMB to invest in portfolio companies. This new scheme to some extent may cool down the appetite of foreign investors to set up RMB funds using the pilot QLFP scheme in Pudong, Shanghai, whose primary objective is to help convert the foreign currency capital injected by foreign limited partnersinto RMB for the purpose of portfolio investment.
E. RMB-denominated shareholder loan and foreign debt
The PBOC Rules clarify that an FIE can borrow foreign RMB debt from its parent, offshore affiliate and offshore financial institutions so long as it has sufficient foreign debt quota. PBOC special approval for RMB shareholder loan which is required by PROC Circular No. 145 is no longer necessary. We understand that MOFCOM will not approve the specific foreign debt transaction and instead it will only state in its approval whether RMB foreign debt can be used to solve the funding issue of the FIE when approving the relevant RMB FDI transactions. The PBOC Rules do not release the FIE's obligation to follow SAFE's existing rules to complete the foreign debt registration.
Based on the PBOC Rules and MOFCOM Circular, we tend to view FIEs may pay dividend/liquidation proceeds to its foreign parent in RMB regardless the capital contribution is made in RMB or not. This may not be applicable to RMB shareholder loan or foreign debt as the flexibilities of such transactions would provide too much room to arbitrage the appreciation of RMB exchange rate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.