Jurisdiction - China
Reports and Analysis
China – Handling RMB Account Settlement For Foreign Direct Investment Projects.

 17 September, 2012

 

Legal News & Analysis – Asia Pacific – China – International Trade

  

On 14 June 2012, the Peoples Bank of China published a Notice on Clarifying the Operational Rules for RMB Accounts Settlement for Foreign Direct Investment (the "Notice") (中国人民银行关于明确外商直接投资人民币结算业务操作细则的通知 (银发 [2012] 165号)). The provisions of the Notice was intended to facilitate the use of RMB in foreign investment transactions and sets out the procedures and requirements for foreign parties to open RMB bank accounts for use in their RMB foreign investment activities in China. The Notice also sets out the requirements for domestic parties receiving such RMB foreign investment funds and guidelines for banks involved in handling transactions and funds.

 

Scope of Application

 

The Notice provides guidance on opening basic deposit accounts, special deposit accounts and general deposit accounts related to such RMB. The Notice sets out the different procedures applicable to foreign individuals, companies and partnerships opening such accounts for handling RMB investment from offshore.

 

Accounts for Offshore RMB Investment

 

The accounts shall be designated for a specific permitted use. Separate accounts are required for pre-opening expenses, re-investment proceeds, mergers and equity transfers. There are restrictions on the use of each type of account. Each account will be annotated with its purpose.

Investors are limited to opening one pre-investment expense account and the bank in receipt of a request for the opening of such account is required to confirm that the party has no other pre-investment account in China. The funds in the pre-investment expense account cannot be used to bid for property or acquire real estate. Its use is limited to start up expenses.

Domestic parties who are the recipient of RMB acquisition funds in an M&A transaction are also required to open a special account to receive the foreign party's RMB investment funds. The funds may only be paid into the specific account. The approval certificate for the transaction serves as the basis for opening for these accounts.

 

RMB Loans from Offshore

 

There are special account opening procedures for receiving RMB loans from abroad. An RMB loan received by a foreign investment enterprise is also subject to foreign debt registration requirements. The combined foreign exchange loan and offshore RMB loan cannot exceed the difference between total investment amount and registered capital. The loan will be nominally converted into foreign exchange in order to provide for the registration.

There are a number of restrictions on such loans. Foreign invested property development companies are not entitled to receive RMB loans from abroad. The capital contributions for any enterprises receiving such an offshore RMB loan must be current.

 

Use of Funds

 

The use of the account funds must comply with the activities set out in the enterprise’s business scope and is limited to uses permitted under Chinese law. As with other regulations on the use of offshore RMB for foreign investment purposes, the funds cannot be used to invest in negotiable or derivative instruments or to make entrusted loans. The funds also cannot be used to acquire real estate that is not for self-use or for purchasing financial instruments. The funds received in a capital account, however, can be used to repay both domestic and foreign loans.

The funds further cannot be used to invest in other entities in China unless the foreign investor has holding company or investment company status. This is consistent with SAFE regulations that prohibit the conversion of foreign currency capital contributions into RMB for the purpose of the local investment in China.

 

Prior Accounts

 

The Notice also addresses accounts for handling pre-existing RMB investment from offshore. Parties already operating such accounts are required to bring their accounts into line with the Notice. The current operating status of these accounts is not grandfathered. 

 

Conclusion

 

This Notice should serve to facilitate the use of offshore RMB funds to make investments in the PRC. The Notice represents further step in the development of RMB as an international currency.

 

 

For further information, please contact:

 

Edwarde Webre, Partner, Orrick

edwarde.webre@deacons.com.hk
 

Homegrown International Trade Law Firms in China

 

 International International Trade Law Firms in China 

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