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On 3rd December, 2013, China’s Ministry of Commerce (MOFCOM) issued The Notice on Issues Concerning Direct Investments with Offshore RMB (Notice [2013] No. 87, hereinafter “2013 Notice“). The Notice, which became effective on 1st January, 2014 replaces the 2011 Notice on the said topic (covered in our China Legal Alert of November 2011, hereinafter the “2011 Notice“). It clarifies several issues pertaining to the 2011 Notice and helps to promote the cross-border inflow of RMB by simplifying the regulations governing the use of offshore RMB in foreign direct investment transactions.
The 2013 Notice contains a number of significant changes.
Definition of offshore RMB Foreign Direct Investment
Offshore RMB foreign direct investment refers to the process where foreign investors make direct investments into China using RMB which is lawfully obtained outside of China. Direct investment can take the forms of new establishment, capital increase, equity participation or merger and acquisition, etc.
The 2013 Notice clarified that investors from Hong Kong, Macau and Taiwan are considered foreign investors.
Scope of use
Both the 2011 and 2013 Notices provide a mechanism for foreign investors to use offshore RMB to make foreign direct investments in China.
In the 2011 Notice, the term “lawfully obtained offshore RMB” is defined as:
This definition has not been retained in the 2013 Notice and no replacement has been included to clarify the term. We understand this implies that so long as the funds are lawfully obtained, there are no further limitations in identifying what constitutes “lawfully obtained offshore RMB”. This facilitates the inflow of offshore RMB as more sources of RMB funds can be used to engage in foreign direct investment in the PRC, providing that such funds are obtained lawfully and approved by MOFCOM.
Application Requirements
Under the 2011 Notice, inbound investments made with offshore RMB must comply with the general regulatory requirements that govern foreign investments in China. Furthermore, investors must also provide evidence or documentation of the source of offshore RMB funds, a statement regarding the use of such funds and a completed and signed copy of the Cross Border RMB Direct Investment Information Form.
While the 2013 Notice reiterates the applicability of the laws and regulations governing foreign investments, it abolishes the additional documentation requirements that were specified in the 2011 Notice. Furthermore, in cases where investors apply to reclassify the original capital injection currency as RMB, it is no longer required to obtain approval for the modification of articles of association and contract. This change will save substantial time and cost for investors and allow foreign direct investments to be done more easily.
Approval Mechanism
The 2011 Notice specifies that certain foreign direct investments using offshore RMB will require approval assessments from both the provincial commerce authorities and MOFCOM. This requirement applies to the following circumstances:
The 2013 Notice removes the approval requirements with respect to the foregoing types of investment project. However, it should be noted that the aforementioned approval requirements have not yet been changed in practice. We believe it will take time to change the said mechanism.
Restrictions on offshore RMB investments
Although the 2013 Notice has substantially reduced the regulations governing foreign direct investments using offshore RMB, some restrictions on the use of funds continue to apply. Foreign investors are still prohibited from using offshore RMB funds to directly or indirectly invest in negotiable securities and financial derivatives (not applicable to strategic investments in listed companies), as well as entrusted loans in China.
It is yet to be seen whether the 2013 Notice will in practice be implemented immediately from 1 January 2014 or whether implementation will await detailed implementing regulations to be issued later. It is advisable to consult the competent local office of MOFCOM to confirm the updated official requirements in use of offshore RMB for foreign investment projects on a case by case basis.
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