On 12 October 2011, the Ministry of Commerce (MOFCOM) issued with immediate effect The Notice on Issues Concerning Direct Investment with Offshore Renminbi (Shangzihan  No.889) (MOFCOM Notice). The following day, the People's Bank of China issued Administrative Measures on the Renminbi Settlement Business Relating to Foreign Direct Investment (PBOC Measures). The MOFCOM Notice regulates the foreign investment aspects of inbound investments made with offshore RMB, while the PBOC Measures cover the relevant currency regulations. The promulgation of these new regulations provides more investment channels for offshore RMB, and is perceived as an important step in the internationalisation of RMB. This article focuses on the MOFCOM Notice.
Scope of use
The MOFCOM Notice provides that foreign investors may use “lawfully obtained offshore RMB” for inbound investments. “Lawfully obtained offshore RMB” is defined to include:
Offshore RMB may not be used, directly or indirectly, for acquiring securities or financial derivative products, unless separately approved as a “strategic investor” by MOFCOM, or for making entrusted loans where a bank acts as an intermediary between a lender and a borrower. Foreign investors are required to undertake that the funds will not be used for such purposes.
For private equity fund managers, this development introduces the possibility of establishing RMB investment funds in offshore jurisdictions to raise RMB in Hong Kong with a view to making inbound investments across China in various industries including real estate.
Other applicable regulations
Inbound investments made with offshore RMB will be subject to the general regulations and approvals applicable to foreign investments in China, including Foreign Investment Industrial Guidance Catalogue, national security review of mergers and acquisitions by foreign investors, and antitrust reviews.
Investments will also be subject to industry-specific regulations and approvals, such as those applicable to the banking, securities, and insurance industries.
The MOFCOM Notice does not apply to RMB held onshore in China. Accordingly, investments made with RMB which is derived from foreign-invested enterprises (FIEs) in China and which has not been repatriated (such as dividends, share transfer proceeds, capital reductions, liquidation proceeds and early return on investments) remain subject to the current regulations.
In addition to the standard application documents required for foreign investments, inbound investments with offshore RMB must be supported by supplying to MOFCOM the following documents:
MOFCOM's approval is also required to alter the original investment capital of an existing FIE from other currencies to offshore RMB in order to take advantage of the new regulations. A board resolution and the amended contract/articles of association of the FIE must be submitted along with the above documents.
MOFCOM's general delegation to the local authority of approval authority for foreign investments is applicable to inbound investments made with offshore RMB. However MOFCOM's approval is required in the following circumstances:
Upon receipt of a local authority's pre-approved Cross Border Renminbi Direct Investment Information Form, MOFCOM shall within 5 business days respond by either granting the approval or issuing opinions.