China MOFCOM officially issued the Notice Concerning Foreign Investment into China by Using Offshore RMB Funds

The China Ministry of Commerce (MOFCOM) officially issued the Notice on Various Questions related to Cross-border RMB Direct Investment on 12 October 2011.

The Notice works in conjunction with the current regulations of the State Administration of Foreign Exchange (SAFE) in April and the People’s Bank of China (PBOC) in June this year and therefore establish an operable legal framework to regulate foreign investments into China by using offshore RMB funds.

The Notice defines "cross-border RMB FDI" as direct investment made by foreign investors according to law in the PRC by using offshore RMB funds legitimately obtained by the foreign investors.

In relation to these arrangements the following points are worth noting:

• Subject to the various requirements, foreign investors may use their legitimate offshore RMB funds to invest into China.
• The legitimate offshore RMB funds may include (i) RMB proceeds derived by foreign investors from cross-border RMB trade settlement, issuance of RMB bonds or shares outside of China, or (ii) RMB profits gained, or proceeds obtained by foreign investors resulting from share transfers, capital reduction, liquidation or earlier recovery of capital investment, from any other previous investments in China.
• RMB capital investment into China as so permitted must not be used, directly or indirectly, to invest in domestic securities or financial derivatives, or to provide entrustment loans or refinancing of any existing onshore or offshore loans.
• Central MOFCOM approval is required for RMB cross-border capital investments into China if:
  1. the investment amount is RMB 300 million or more;
  2. the investment will be made into industrial sectors of financing security, finance leasing, small amount credit loans or auction;
  3. the companies to be invested are foreign-invested investment companies, foreign-invested venture capital or equity investment enterprises; or
  4. the investment will be made into industries subject to government macro control, such as cement, steel, electrolytic aluminium and ship building.

Other than the above, the current regulations governing allocation of approval powers between central MOFCOM and its local counterparts shall remain apply.

The Notice was developed from the one-paragraph provision in MOFCOM’s notice in February this year which provides that all RMB foreign investments into China should be subject to the final consent of central MOFCOM (through its Foreign Capital Division).

The Notice follows the overall trend of allowing offshore RMB to be channelled back to the China market. However, this process is still subject to a tight control at this stage as any such RMB capital investment may trigger central MOFCOM approval (as mentioned above) and will also require PBOC approval (although the requirement for SAFE approval looks less likely to be an issue).

Original text of Notice on Various Questions related to Cross-border RMB Direct Investment in Chinese

Original text of Renminbi Foreign Direct InvestmentSettlement Rules in Chinese