Since the launch of the pilot program of RMB settlement in
cross-border trade transactions in July 2009, the volume and
complexity of the said transactions and the ancillary banking
businesses have been rapidly increasing. During the past two years,
the pilot program was carried out in 20 provincial regions. PBOC
plans to expand the pilot program to the whole country within this
year. In order to satisfy business and banking industry's
strong needs for policy transparency, regulatory authorities such
as SAFE and MOFCOM have issued various rules and guidelines aiming
to streamline cross-border flows of RMB. On June 8, 2011, PBOC
published a most recent circular 1
"Circular") which clarifies several
major issues relating to cross-border RMB transactions. Industry
feedback regarding the Circular has been positive and the Circular
has been interpreted as "a significant step towards the
internationalization of RMB" by the market.
We highlight the key points of the Circular worth noting as
RMB Trade Indebtedness: Payment obligations
owed by PRC residents to offshore counterparties under cross-border
RMB trade transactions, including without limitation the issue of
RMB usance L/C, offshore advance payment and deferral payment and
other forms of trade indebtedness would not be deemed as foreign
debts. This will make it easier to create a free-flowing
channel of RMB funds between the onshore and offshore capital
RMB Guarantee or L/C issued by onshore banks
in favor of offshore entities would not fall within the regime of
foreign security/guarantee. It would relieve onshore banks
from the foreign security quota concerns. More opportunities
may be explored where the offshore entities are willing to accept
RMB guarantee or RMB L/C to back offshore lending. The RMB
guarantee or L/C, if structured properly (mainly using RMB
guarantee/L/C as a vehicle for offshore lenders to gain a pari
passu position with onshore lenders), may resolve the traditional
pitfall embedded in the onshore/offshore structure where offshore
lender cannot get access to onshore collateral.
RMB FDI: The Circular emphasizes that so far
the RMB FDI transactions is still at its pilot stage and should be
subject to PBOC head office approval on a case-by-case basis,
primarily for prevention of hot-money inflows. However, it does
provide a detailed step-by-step process on how to obtain PBOC's
approval. According to the process, foreign investors or WFOEs
shall ask their settlement banks in China to submit the RMB FDI
applications to particular PBOC offices together with pre-obtained
MOFCOM approvals for the same transaction. Complete
applications will be handed over to PBOC head office for final
approval. This approval requirement applies to greenfield
projects, M&As of onshore enterprises (excluding round-trip
investments), equity transfer and shareholder loans. At this
moment PBOC does not accept applications for transactions falling
within the "restricted" category or under policy control
(presumably this refers to financial and real estate sector).
Although it remains yet to be seen how in practice SAFE and MOFCOM
will react to the PBOC requirement, it is likely that onshore banks
will be keen to follow the PBOC requirement, thus making it a
requirement for banks' client to comply with.
Genuine Trade Review: PBOC requires onshore to
verify whether there are genuine transactions behind RMB settlement
request from customers. Onshore settlement banks as well as
offshore participation banks are generally not allowed to provide
RMB settlement services if the applicant is pursuing arbitrage
(such as RMB-NDF contracts) without any genuine RMB cross-border
trade background. Moreover, onshore settlement banks are kept from
providing RMB settlement services to onshore importers under the
situation where the onshore importers intend to do currency
conversions outside mainland China and settle the transaction with
For you ease of reference, we summarize in the appendix a matrix
which identifies the relevant regulatory authorities for various
types of RMB cross-order capital-account transactions and
regulatory authorities' discretions on specific businesses.
1. The PBOC Circular on Clarifying Relevant Issues of
Cross-border RMB Transactions
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The RBI, on March 31, 2016, has notified the Foreign Exchange Management (Establishment of a Branch office or a liaison office or a Project office or any other place of business) Regulations, 2016 in India...
The committee set up to draft a Code on Resolution of Financial Firms, by the Ministry of Finance, Government of India, on September 28, 2016, released a draft bill – The Financial Resolution and Deposit Insurance Bill, 2016...
The distressed assets situation in India has gradually worsened over the past few years. The stressed loans issue in banks has resulted from a combination of factors including :-
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).