China's central bank has taken further steps to liberalise the country's tightly controlled capital outflow, allowing some Chinese domestic companies to use domestic renminbi for overseas direct investment, and further demonstrating the Chinese government's firm commitment to steadily progress its renminbi internationalisation agenda.

Cross-border trade renminbi settlement pilot scheme

The new measures [1] ("PBOC Policy") were released by the People's Bank of China on 13 January 2011 and are effective immediately.

The measures build upon the pilot scheme which was first launched in July 2009 but at the time limited to trade items (i.e. goods, services and other current account items) conducted with Hong Kong, Macau and ASEAN countries by a limited number of "pilot enterprises" selected from five "pilot cities" (Shanghai and four cities in Guangdong province).

Encouraged by the positive results of the initial trial, the Chinese authorities further expanded the scope of the pilot scheme in mid 2010 to the worldwide transactions conducted by pilot enterprises (around 67,359) selected from 20 provincial-level regions.

Key aspects of the PBOC Policy

  • Scope of application

The PBOC Policy further expands the pilot scheme from trade items to overseas direct investment by non-financial enterprises registered in the cross-border trade renminbi settlement pilot cities [2]. The PBOC Policy also makes it clear that overseas direct investment by domestic financial institutions shall be governed by the same rules, unless different rules apply [3]. We understand that no such rules have yet been issued.

Overseas direct investment refers to those activities which are verified by the authorities in charge of overseas direct investment and which use renminbi funds to:

  • establish business or projects overseas; or
  • partially or fully acquire ownership, control or operational interests and managerial rights in businesses or projects overseas.

Such definition appears to exclude investment in offshore financial products.

  • Joint administration by the PBOC and the SAFE

The PBOC Policy is jointly administered by the PBOC and the State Administration of Foreign Exchange (SAFE), but to encourage efficiency, separate approvals from both authorities are not required. Instead, SAFE is charged with the responsibility of registering applications for overseas investment in renminbi, a process which should be largely administrative and take no more than three days.

  • Preliminary transaction costs

Once the SAFE registration is completed, domestic institutions are permitted to pay for their "preliminary transaction costs" using renminbi funds. Any payments exceeding 15% of the proposed total investment amount (in a lump sum payment or in aggregate) cannot be made without the prior approval of the relevant Chinese outbound regulatory authorities[4].

  • Chinese outbound regulatory approval

Before Chinese banks will accept renminbi remittance applications (other than the payment for the preliminary transaction costs), domestic institutions must have obtained the verification certificates from the relevant Chinese authorities in charge of overseas direct investment approval (verification).

  • Foreign currency component

Domestic institutions are permitted to supplement their approved renminbi funds (quota) with chosen foreign currencies, provided that the aggregated amount of those different currencies does not exceed the amount of total investment approved by the Chinese authorities. But such foreign currency component requires a separate SAFE approval which is generally undertaken as part of the standard Chinese outbound regulatory approval process.

  • Profit repatriation

Domestic institutions can opt, but are not required, to repatriate the profits made from their overseas investments back to China in renminbi.

  • Ongoing administration

If domestic institutions need to pay renminbi back to China or out of China as a result of capital increase or reduction, equity transfer or liquidation occurring to their overseas enterprises, they can do so through Chinese banks on support of the verification certificates issued for such changes by the authorities in charge of overseas investment.

  • Renminbi loan

Domestic institutions can borrow renminbi directly for their overseas investment from Chinese banks (or Chinese banks' overseas branches) on meeting normal domestic lending requirements.

  • Reporting obligation

Domestic institutions must report to their local SAFE branches within 30 days if the name, term, joint venture partner or cooperation structure of their overseas enterprises changes, or if an event such as capital increase or reduction, equity transfer or swap, merger or division, or liquidation occurs to such enterprises.

  • Remitting bank's obligations

Chinese banks have various reporting, filing and reviewing obligations under the PBOC Policy. Generally speaking, Chinese banks must file relevant information with the national Renminbi Cross-border Receipt and Payment Information Administration System for each cross-border renminbi transaction they handle. They are required to exercise prudence in reviewing the application materials submitted by domestic institutions to make sure the nominated transaction is genuine and must comply with all relevant anti-money laundering and anti-terrorist financing requirements.


The interest of counter-parties to Chinese outbound transactions in accepting renminbi for their assets is yet to be tested by the market -- so far overseas renminbi holders only have very limited access to the onshore renminbi markets, and the offshore renminbi market is yet to be developed.

It also remains to be seen if Chinese investors will be interested in funding their overseas acquisitions with renminbi, given the clear upward trajectory of renminbi's appreciation in the mid to long term. One exception may exist for those transactions undertaken by Chinese outbound investors for assets owned by Chinese mainland investors in Hong Kong (such as acquisitions of the so-called red chip companies) -- there appears to be clear advantages in settling those acquisitions in renminbi between them either onshore or offshore, as this can avoid the troubles and foreign exchange fluctuation risk associated with converting renminbi into another currency.

The PBOC Policy will offer the parties to the China outbound transactions an option to settle their deals in renminbi, a currency which looks increasingly attractive over time.

[1] The Administration Measures for the Pilot Scheme for Overseas Direct Investment Using Renminbi Settlement

[2] Shanghai, Guangdong, Beijing, Tianjin, Inner Mongolia, Liaoning, Jilin, Heilongjiang, Jiangsu, Zhejiang, Fujian, Shandong, Hubei, Guangxi, Hainan, Chongqing, Sichuan, Yunnan, Tibet and Xinjiang

[3] Art 23, the PBOC Policy.

[4] Such authorities generally refer to NDRC (National Development & Reform Commission), MOFCOM (Ministry of Commerce), SAFE and SASAC (State-owned Assets Administration & Supervision Commission) (if the Chinese investors are state-owned enterprises), and their respective provincial counterparts. The approval levels are dictated by the investment size and the nature and locality of the targeted assets. Approvals must be obtained separately from the CBRC (China Banking Regulatory Commission) and the CIRC (China Insurance Regulatory Commission) for acquisitions undertaken by Chinese financial institutions and insurance companies

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.