31 March, 2016
Due to the recent stringent control of foreign exchange outflow and for certain other reasons, remittance of foreign exchange out of China for outbound investments has taken longer than before and the uncertainty has also increased. Meanwhile, with the recent inclusion of Renminbi in Special Drawing Rights currency basket, Renminbi's internationalization has expedited. Against this background, we expect that more Chinese entities will invest overseas directly in Renminbi funds.
I. Applicable Rules
The applicable rules concerning Renminbi overseas direct investment 1 mainly include the Measures for the Administration of Pilot Program on Settlement of Outbound Direct Investment in Renminbi promulgated by the People's Bank of China in 2011 (the “Measures”) and the Notice on Certain Issues in Relation to the Administration of Handling of Cross-Border Renminbi Capital Accounts issued by the State Administration of Foreign Exchange in the same year (the “Notice”).
Under the Measures, a non-financial enterprise registered in the pilot program region2 may, after completing the required governmental filing/approval procedures, have banks remit Renminbi funds out of China for their outbound direct investments (greenfield projects or acquisition of equities or other interests in overseas entities), within the amounts as set forth below:
(1) the total amount of preliminary expenses remitted out of China shall, in principle, not exceed 15% of the total investment amount as stated by the Chinese investor in its application documents submitted to the relevant authorities; and
(2) the total amount of Renminbi funds and foreign exchange funds (if any) remitted outward shall not exceed the total investment amount as approved/filed with the relevant authorities.
The Measures and the Notice also provide that profits earned from the overseas direct investment in Renminbi and certain other earnings and expenditures generated therefrom may be remitted outward and inward in Renminbi.
In addition to the direct investment in Renminbi funds, there seems to be another possible route where, pursuant to Article 15 of the Measures, a Chinese investor may, via its overseas subsidiary, obtain Renminbi financing overseas for the payment of the acquisition price.
II. Our Observations
The Measures and the Notice have been in place for some time, but it seems that for various reasons, Renminbi was not the currency that many Chinese investors considered using for their overseas acquisition. However, due to the recent difficulty in outward flow of foreign exchange, we have noted that more and more investors now turn to Renminbi to facilitate their outbound investments.
From our experience, replacing foreign funds with Renminbi seems to be a viable option for many outbound transactions, if the target is registered in a country or region where RMB clearing can be handled3. From a transactional (not a regulatory) point of view, if the counterparty does not accept Renminbi, Chinese investors need to ensure that the Renminbi funds can be converted into the agreed currencies in the destination country. Furthermore, the payment in Renminbi may have potential impacts on the transaction structure, closing arrangement and timeline, etc. Hence, it needs to be well planned ahead in order to invest in Renminbi funds4.
1 Our discussion here does not cover the “overseas securities investment” through RQDII scheme or other routes.
2 Pursuant to the applicable rule, the region covers Beijing, Tianjin, Shanghai and 17 other provinces, municipalities and autonomous regions.
3 Currently, over 20 countries and regions, including Singapore and Hong Kong, can handle Renminbi clearing.
4 For example, the Measures provide that a Chinese investor must specify the amount of Renminbi funds which it plans to
use for its overseas direct investment in its application documents to the relevant authorities. Hence, Chinese investors must leave the room for future investment in Renminbi at the stage of governmental procedures.
For further information, please contact:
Ying Zhang, Partner, Jun He
zhangying@junhe.com
