PBOC allows RMB settlement by foreign investors

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On 31 October, the People’s Bank of China published the Foreign Direct Investment in Renminbi Settlement Business Administrative Measures which became effective on the same day. The Measures explicitly provide that enterprises, economic organizations or individuals from abroad (collectively referred to as foreign investors) which invest in China using renminbi are permitted to apply directly to banks for the handling of renminbi settlement in compliance with the legislation in connection with foreign direct investment. Banks are permitted to process the settlement of renminbi funds for them in accordance with relevant regulations.

Inward remittance of RMB funds

According to the Measures, renminbi remitted from overseas must be credited to a special deposit account under the following circumstances, but this account is not to be used to process cash payments and receipts.

  1. If a foreign investor handles renminbi settlement business relating to foreign direct investment, it is permitted to apply to open a renminbi settlement bank account for an overseas office. In particular, depending on the sources and uses of funds, it should separately open a special deposit account for renminbi upfront fees and a special deposit account for renminbi reinvestment.
  2. If a foreign investor remits registered capital in renminbi from overseas or pays capital contributions in renminbi, it must do so using special-purpose accounts by opening a special deposit account exclusively for keeping renminbi capital funds.
  3. If a foreign investor forms a foreign investment enterprise by acquiring or merging with a domestic enterprise using renminbi, the Chinese shareholder of the acquired or merged domestic enterprise must apply to open a deposit account dedicated to the M&A project and exclusively to hold the renminbi capital remitted by the foreign investor for the M&A project. If a foreign investor pays the Chinese shareholder of a foreign investment enterprise in China renminbi in payment for an equity transfer, the Chinese shareholder must apply to open a deposit account dedicated to the equity transfer in renminbi exclusively to hold the renminbi remitted by the foreign investor to pay the price of the transfer.
  4. If foreign companies with an investment nature, foreign-invested venture capital enterprises, foreign equity investment enterprises and foreign-invested partnerships with investment as their principal business carry out investment business using renminbi according to the law in China, the enterprises they invested in must apply to open a special deposit account for renminbi capital funds exclusively for keeping renminbi registered capital or capital contribution funds, and handle the settlement of the relevant funds.

Use of RMB funds

According to the Measures, renminbi funds derived by foreign investors must be used in the following ways: (1) if a foreign investor remits renminbi profit out of China, a bank is allowed to handle the remittance once it has reviewed the relevant documents; (2) if a foreign investor remits out of China renminbi funds derived from capital reduction, share transfer, liquidation, advance recovery of investment or for other reasons, a bank can handle the outward remittance formalities for the foreign investor once it has reviewed the approval or filing documents and tax certificate issued by relevant national authorities; (3) if a foreign investor reinvests in China or increases registered capital using renminbi funds derived from renminbi profit distribution, advance recovery of investment, liquidation, capital reduction, share transfer or other reasons, the foreign investor can credit the renminbi funds to a deposit account exclusively for renminbi reinvestment, and handle relevant settlement. A bank can effect renminbi fund payments to foreign parties once it has reviewed the approval or filing documents and tax certificate issued by relevant national authorities.

Overseas borrowing

According to the Measures, renminbi and foreign currency loans borrowed by a foreign investment enterprise from an overseas shareholder, an affiliate within a group or an overseas financial institution should be combined to calculate their total size. The foreign investment enterprise should apply to open a general renminbi deposit account on the strength of a renminbi loan contract, exclusively for keeping renminbi funds borrowed from abroad. If the foreign investment enterprise repays the principal and interest of a foreign renminbi loan with renminbi, it can effect the repayment at a bank directly on the strength of a loan contract, a letter of warrant for payment, a tax certificate or other documents.

Regulation and penalties

The Measures clarify the supervisory and management obligations of a bank: a bank should review whether the use of renminbi registered capital and renminbi loans by a foreign investment enterprise is true and compliant; monitor the use of renminbi funds by foreign investment enterprises according to law; and meet anti-money laundering and anti-terrorist financing obligations. During the settlement process, the bank should ask companies to provide a letter of warrant for payment, proof of use of funds and other documents in accordance with relevant prudential rules, and review them carefully.

If a bank or a foreign investment enterprise violates relevant rules, the People’s Bank of China can, in conjunction with related departments, circulate a notice of criticism against or impose penalties on the bank or the enterprise according to the law. If the case is serious, it can suspend the cross-border renminbi business of the bank or the enterprise, or ban it from continuing to carry out such business.

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.

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