PBoC Issues Guidelines for Inbound FDI in RMB – PE Fund Opportunities

On 8 June 2011, the People's Bank of China (PBoC) issued a new set of guidelines “Notice on Clarification of Cross-Border RMB Business Related Issues, Yinfa [2011] No. 145” (the Notice).

While a significant part of the Notice focuses on the tightened regulations to ensure offshore RMB settlement transactions on trading activities are genuinely backed by actual trading of goods or services, the PBoC has taken a significant step forward by setting out the approval procedures for RMB-denominated Foreign Direct Investment (FDI) in Article 14 of the Notice, which will serve as useful guideline for potential investors seeking to invest in the PRC using offshore RMB funds.

Article 14 of the Notice stipulates a trial scheme, which permits foreign investors to apply RMB legally raised offshore to set up companies, or to merge with or acquire other companies, or to increase their stakes in or to provide shareholders' loans to subsidiaries. Under this trial scheme, there is a five-step procedure for approval:

(i) The application has to be initiated by the local clearing bank in the PRC acting for the foreign investor or the foreign-invested enterprise, and a separate application is required for each proposed project.

(ii) The local clearing bank will have to make written application to the branch office of the local PBoC at a sub-Provincial City central level or higher, and the supporting documents shall include the approval certificate and documents issued by the Ministry of Commerce or its local bureau on the establishment of the foreign invested enterprise.

(iii) Upon receipt of the application, the local branch office of the PBoC will review the same and then forward the application to the Central PBoC for approval.

(iv) The Central PBoC will collectively consider and evaluate the applications received in a review session and then grant approval to individual projects on a case-by-case basis.

(v) Upon approval by the Central PBoC, the relevant branch office of the PBoC will then issue a written notification to the applicant (i.e. the local clearing bank), who may then open a RMB settlement bank account for its client for the proposed FDI operation.

It should be noted that the above scheme is not applicable to FDI projects that fall under the restricted category or a category under key control by the State.

This is the first time that China has formalized its rules on RMB-denominated foreign direct investment; the new guidelines demonstrate the central government's stepped-up effort in liberalising inbound RMB-denominated FDI. The development provides an opportunity for foreign managers to launch funds to raise RMB offshore and invest into the PRC market directly upon obtaining approval from the PBoC. The Notice does not provide the details of applicable investment restrictions for offshore funds. We expect an announcement of further implementation rules to simplify the above five-step approval procedure and more specific provisions on investments by offshore RMB funds.