|Renminbi Becomes One Settlement Currency in Overseas Direct Investments by Chinese Entities|
China's People's Bank of China (PBoC) issued the Administrative Measures over Pilot Projects on Settlement of Overseas Direct Investments in Renminbi ("Measures") earlier this month. The Measures allow Chinese entities to set up overseas entities or acquire overseas equity in Renminbi. The Measures also permit Chinese entities to later repatriate from overseas their investment proceeds in Renminbi. In addition, Chinese banks are permitted to extend Renminbi loans to the overseas investees of Chinese entities.
Historically, Chinese entities were preempted from conducting cross-border transactions directly in Renminbi. For the entities without non-Renminbi cash, they would need to go through an involved process of obtaining the approval of an office of State Administration of Foreign Exchange (SAFE ) and upon such approval, selling their Renminbi cash to an authorized bank in exchange for the non-Renminbi cash to close the transaction. On overseas equity investment, entities are also required to obtain the dual approvals from the authorized regional offices of China's National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM). Under the Measures, Chinese entities would still need the dual administrative approvals of NDRC and MOFCOM. However, SAFE would only be charged with checking the existence of such approvals and entering the Chinese entities' information in its system. Then, the settlement banks of the Chinese entities in China would facilitate the wiring of Renminbi investment proceeds overseas based on the information entered by SAFE.
Since July 2009, China has launched the Renminbi settlement trial projects in trade-related items in a few "pilot" cities and targeting a few overseas jurisdictions. The domestic "pilot" cities were expanded to 20 provinces and the overseas target jurisdictions became worldwide in 2010. China also entered into a bilateral treaty with Hong Kong Special Administrative Region to open the Renminbi business to authorized banks in Hong Kong, in an effort to increase the offshore Renminbi pool retained in Hong Kong. Henceforth, the Renminbi settlement and derivatives markets emerged and became booming in Hong Kong.
In October 2010, in anticipation of phased opening of international business using Renminbi as the settlement currency, PBoC also issued some measures to regulate the Chinese onshore Renminbi accounts of non-Chinese entities, partly, in response to the surging anti-money laundering needs in the increased cross-border transactions using Renminbi.
It remains to be monitored how China will diversify the ways by which the offshore counterparts, such as the targets or the transferring shareholders of the targets, of Chinese entities may "return" their Renminbi investment proceeds into China.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Feb.9, 2011