To read our eAlert on the PBOC Measures and the English translation, please click here.

The final form is largely in line with the consultation draft with only a couple of differences which we highlight below in our review of the key contents of the MOFCOM Circular.

Scope of application

The MOFCOM Circular applies to "cross-border foreign direct investment in renminbi", which includes any direct investment activities carried out by foreign investors in China according to PRC law with legitimately sourced offshore renminbi. Despite its broad wording, the MOFCOM Circular only addresses such investment by way of equity. We continue to believe that it is not the intention of MOFCOM to assert any jurisdiction over such investment by way of debt other than in very limited circumstances (such as where the total investment size of the onshore foreign invested enterprise needs to be increased to provide greater “headroom” for debt investment).

“Offshore renminbi” is defined in the MOFCOM Circular as renminbi obtained by a foreign investor through:

(i) cross-border renminbi trade settlement;

(ii) profit distribution, share transfer, reduction of capital, liquidation, and early repatriation of investment (where proceeds are received in renminbi in each case); and

(iii) other legitimate offshore channels, including but not limited to issuance of offshore renminbi denominated bonds or offshore renminbi denominated shares.

This definition determines the permitted source of funds for renminbi direct investment. It is clear that using dim sum bonds proceeds for direct investment by way of equity is permitted and covered by this circular.

Restriction on the onshore utilisation of reminbi

The MOFCOM Circular imposes certain restrictions on the ways in which the renminbi proceeds of cross-border foreign direct investment may be used onshore by the onshore entities. Such renminbi cannot be used, directly or indirectly, for investment in securities, financial derivatives or entrustment loans. The only exception to the prohibition on investment in securities is strategic investment in a listed company by way of private placement or off-exchange transfer of shares, which the regime of strategic investment in listed companies will govern. This exception was not included in the consultation draft.

Significantly, the prohibition on using such renminbi for repayment of onshore or offshore loans which was originally contained in the consultation draft has been removed. This opens the possibility of using, for example, the repatriated dim sum bond proceeds to refinance the existing loans of the onshore receiving entity.

Approval process

The principle is that the MOFCOM approval process for foreign direct investment in renminbi should generally follow that for foreign direct investment in foreign currencies with minimum modifications, the most significant of which are described below:

(i) Level of approving MOFCOM

Where the investment in renminbi

(a) is equal to or exceeds 300 million yuan;

(b) involves industries such as financial guarantee, financial leasing, "small amount" credit or auction;

(c) is made into a foreign invested investment company, foreign invested venture capital or private equity investment entity; and

(d) involves industries subject to state control such as cement, steel, electrolytic aluminium or shipbuilding,

The approval of central MOFCOM must be sought after the provincial level MOFCOM office has reviewed and endorsed the application. Central MOFCOM shall decide whether to approve or not within 5 business days. However, there is no timeline indicated for the review and endorsement of lower level MOFCOM offices.

The inclusion of financial guarantee, financial leasing, small amount credit and auction industries indicates a continued sensitivity in respect of financial or quasi-financial industries. The MOFCOM Circular does not cover other financial industries such as banking, securities or insurance industries over which MOFCOM does not have substantive jurisdiction. Any direct investment in renminbi in institutions falling within these industries is subject to the approval of the relevant financial regulators.

The approval process in respect of direct investment in real estate industry in renminbi will be the same as that in a foreign currency.

(ii) Application documents

In addition to the usual documents a foreign investor should submit for the purposes of making foreign direct investment in a foreign currency, it should also submit, for investment in renminbi, the following,:

(a) proof or an explanation of the source of renminbi funds to be used for investment;

(b) an explanation of the proposed use by the onshore receiving entity of such renminbi; and

(c) a completed Information Form of Cross-border Renminbi Direct Investment (a copy of which is attached to the MOFCOM Circular).

A board resolution, appropriate amendments to the original joint venture contract and the articles of association of the onshore entity will need to be produced to and approved by the MOFCOM office at the appropriate level for changing the currency of investment.

Conclusions

The near-simultaneous promulgation of the PBOC Measures and the MOFCOM Circular is evidence of continuous dialogue and a concerted effort between MOFCOM and the PBOC in promoting renminbi internationalisation. They have brought much welcomed clarity to the inbound renminbi direct investment regime, which will encourage more offshore renminbi to flow back onshore and facilitate circulation of renminbi.

Specifically of interest to the dim sum bond market, the State Administration of the Foreign Exchange (SAFE) now remains the only PRC government agency which has not published clear guidelines on repatriation (in the case of SAFE, by way of debt), although it has clearly assumed jurisdiction in this respect. Although uncertainty will remain in this area given the variation of practice of SAFE in different localities, SAFE’s discretion is relatively limited and SAFE formalities are regarded more as a matter of time than substance.