Bank pilots RMB settlement for outbound direct investment

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Bank pilots RMB settlement for outbound direct investment, 中国推动境外直接投资人民币结算试点

On 6 January, the People’s Bank of China issued the Outbound Direct Investment Pilot Renminbi Settlement Administrative Measures, which came into effect on the day they were issued. The 2011 Measures are a further step in China’s promotion of the internationalization of the renminbi following the formal implementation of the Cross-border Trade Pilot Renminbi Settlement Administrative Measures of 1 July last year.

Scope of application

The 2011 Measures apply to outbound direct investment (ODI) by domestic institutions. They specifically refer to the use by domestic institutions, approved by the authorities in charge of ODI, of renminbi funds overseas to establish or acquire full or partial ownership, control or management over enterprises or projects through setting up new businesses, mergers and acquisitions or equity participation.

Domestic institutions means non-financial enterprises registered in the pilot areas for renminbi settlement in cross-border trade.

Prior approval and registration

A domestic institution should have the approval of the authorities in charge of ODI when it carries out ODI in renminbi; moreover, it should clearly state the amount of renminbi to be invested when seeking approval for the investment.

After obtaining approval, before the first remittance of renminbi funds related to the investment, a domestic institution should carry out prior registration formalities with the local Administration for Foreign Exchange for the remittance of funds or investment overseas.

Follow-up handled by banks

After approval and registration have been completed, a domestic institution may go to a bank to effect the remittance of funds overseas for ODI in renminbi or for upfront renminbi expenses.

The domestic institution, taking with it resolutions regarding the disposal of profits made by the board of directors of the enterprise seeking to carry out the ODI, should go directly to a bank to carry out the formalities to repatriate in renminbi the profits made from outward direct investment.

In the case of renminbi payments by a domestic institution engaged in ODI due to increases or decreases in its capital, share transfers or liquidations, it can go directly to a bank to carry out the formalities for the outward and inward remittance of renminbi funds using the approval documents issued by a department in charge of ODI.

On the basis of the relevant provisions, banks can also issue loans in renminbi to enterprises or projects overseas in which domestic institutions have invested.

Limits on the amount remitted

The upfront costs cumulatively remitted overseas by domestic institutions should, in principle, not exceed 15% of the total investment reported by the Chinese side to the departments in charge of ODI.

Where a business related to the ODI in renminbi by a domestic institution needs at the same time to use foreign exchange funds, the domestic institution should carry out the formalities for the outward and inward remittance of foreign exchange for the ODI. However, the sum of the renminbi funds and of the foreign exchange funds remitted overseas for ODI should not exceed the total amount of investment approved by the departments in charge of ODI.

The 2011 Measures require banks, when handling such business, to fulfil their obligations of prudential supervision, guarding against money laundering and terrorist financing. In addition, they provide for corresponding penalties for banks and domestic institutions which violate the regulations.

Business Law Digest is compiled with the assistance of Haiwen & Partners. The authors can be emailed at baochen@haiwen-law.com. Readers should not act on this information without seeking professional legal advice.