China to Permit Foreign Investment in RMB

August 26, 2011 Posted by China Briefing Reading Time: 3 minutes

Aug. 26 – Foreign investors, including investors from Hong Kong, Macau and Taiwan, will likely be able to conduct foreign direct investment (FDI) in China with the local Chinese currency (RMB) they legally obtained overseas. With regards to related issues, China’s Ministry of Commerce has just released a draft of the circular on Monday for public opinions.

The “Circular on Issues Related to Cross-border RMB FDI (Draft for Opinions)” defined “RMB legally obtained overseas” as follows:

RMB-denominated funds foreign investors obtained overseas through legal channels, including but not limited to channels of RMB cross-border trade settlement and RMB bond or stock issuance overseas
RMB profits foreign investors transferred overseas from their foreign-invested enterprises (FIEs) and RMB-denominated funds foreign investors obtained through FIE share transfers, capital reduction, liquidation and early investment recovery

The Circular Draft stresses that all the FDI conducted with RMB-denominated funds legally obtained overseas shall still follow FDI-related laws, FDI industrial policies and regulations on security and anti-monopoly inspections of mergers and acquisitions. In addition, cross-border RMB FDI shall not be used on securities, financial derivatives, entrusted loans or loan payback.

Foreign investors shall submit required paperwork to apply for project approval from the local commercial authorities. Local commercial authorities will need to report to the state Ministry of Commerce and obtain its approval when reviewing the following types of cross-border RMB FDI:

FDI with invested capital amounting to, or more than, RMB300 million
FDI involved in the industries of financing guarantees, finance leases, microfinance and auctions
FDI into investment companies, venture capital companies and equity investment enterprises
FDI involved in macro-controlled industries such as industries of cement, steel, aluminum and shipbuilding

The Circular Draft will be open for public opinions until September 20. Any related opinions can be published here.

If passed, it means that foreign investors will be able to use RMB for direct investment into China. Currently, foreign investment is defined by overseas capital being required as an injection. The move will free up foreign investors to establish operations and/or expand existing facilities without having to draw down on international funds external from China.

Such changes will also save foreign investors considerable sums of money. At present, further FDI from existing foreign-invested businesses in China have to declare profits in RMB, in China. In order to convert into foreign currency and repatriate these profits, a dividend tax of 10 percent is payable. Although there are incentives for reinvesting RMB into China, in reality many foreign businesses repatriate first then reinvest afterwards. Those foreign investors that have kept large sums of RMB on hand within their China capital accounts will now be able to utilize that much more freely than was previously the case.

It may also mean changes to the standard draft articles of association for foreign invested companies in terms of defining the capital. Typically, capital requirements are identified in the foreign currency being utilized. For the first time, a company’s articles of association and capital verification certificate may include RMB as a denominated amount, and also provides the scenario that capitalization of a foreign entity in China may now be recognized in part RMB and part overseas currency.

Dezan Shira & Associates can assist with advice concerning capitalization issues and foreign investment into China. Please contact the practice at info@dezshira.com.

Related Reading

Using Hong Kong for China Operations
An examination of the different types of holding companies that are available to foreign investors and the advantages they can impart, from ease of incorporation to a favorable tax regime. We also run through the incorporation procedures for establishing a company in Hong Kong and lay out the accounting and financial requirements that affect Hong Kong companies. A brief introduction to Hong Kong’s double tax agreements is also provided. (PDF US$10)

Setting Up Wholly Foreign Owned Enterprises in China (Third Edition)
This guide provides a practical overview for any business-minded individual to understand the rules, regulations and management issues regarding establishing and running a WFOE in China.