Use of Offshore Renminbi in Foreign Direct Investments in China

On October 12, 2011, the Ministry of Commerce ("MOFCOM") issued The Notice on Issues Concerning Direct Investment with Offshore Renminbi 商務部關於跨境人民幣直接投資有關問題的通知(Shangzihan [2011] No.889) ("MOFCOM Notice") which took effect on the same day. The MOFCOM Notice largely follows the consultation draft that MOFCOM issued on the topic on 22 August 2011 and which was featured in our China Legal Update of September 2011. The content of the MOFCOM notice does not deviate from the consultation draft to any significant extent.

Scope of Use

The MOFCOM Notice sets out a method for using lawfully obtained offshore RMB for foreign direct investment in the PRC, allowing a foreign investor to use such funds to make capital contribution to foreign investment enterprises or engage in other direct investment transactions.

The definition of "lawfully obtained offshore RMB" has not changed significantly from the consultation draft and includes:

• RMB obtained offshore through cross border trade settlement, and RMB repatriated from China as dividends, share transfer proceeds, capital reductions, liquidation proceeds and early returns on investment, and

• RMB obtained offshore through lawful channels, including but not limited to proceeds received from issuance of offshore RMB denominated bonds and shares.

The MOFCOM Notice prohibits the use of such RMB to directly or indirectly acquire securities or financial derivative products (with an exception) or to make entrusted loans. The consultation draft's express prohibition against using such funds to settle foreign or domestic debt has been removed. Foreign investors shall consent to undertake that the funds will not be used for such purposes in the prescribed application form (Cross Border Renminbi Direct Investment Information Form) in the application process. The use of these RMB funds will be specifically reviewed in the enterprise's annual inspection.

The MOFCOM Notice permits the use of such RMB to acquire securities by a private placement or equity transfer agreement pursuant to the Administrative Measures on Strategic Investment in Listed Companies by Foreign Investors (2006). Investments in listed companies under those Regulations require MOFCOM approval.

Application Requirements

Inbound investments made with offshore RMB will be subject to the general regulatory requirements applicable to foreign investments in China, including compliance with the Catalogue for Guiding Foreign Investment, National Security regulations and the Anti-monopoly regulations.

In addition to the standard application documents required for foreign investments, foreign investors who wish to make inbound investments with offshore RMB must submit the following document:

• evidence or documentation of the source of offshore RMB funds
• a statement regarding the use of such funds
• a completed and signed copy of Cross Border Renminbi Direct Investment Information Form (the "Information Form")

The Information Form replaces the undertaking on the use of funds included in the consultation draft.

Approval Authority

The general delegation of approval authority applicable to foreign investments is applicable to inbound investments made with offshore RMB, however for the following circumstances, MOFCOM's approval is required:

• the amount invested is RMB 300 million or more;
• the business of the FIE involves financial guarantee, financial leasing, small loans or auctioning;
• the FIE is an investment company, venture capital or private equity investment enterprise;
• the FIE is in an industry subject to state regulation, such as the cement, iron and steel, electrolysed aluminium and shipbuilding industries.

Upon receipt of the local authorities' pre-approved Information Form, MOFCOM shall within five (5) working days respond by completing the approval process or issuing its opinion.

Comments

The issuance of the MOFCOM Notice is an important step in the internationalization of the RMB and provides needed guidance on the use of RMB for investment in China. The speed with which the consultation draft became an effective notice reflects the importance of this policy. RMB denominated investments will be of increasing interest to foreign investors in China.