Open gate for cross-border Rmb FDI flows

Since the launch of the pilot Renminbi (Rmb) settlement for cross-border trade in July 2009, the demand for Rmb foreign direct investment (RFDI) has skyrocketed due to the strong interest from foreign enterprises wanting to invest in Chinese companies and the eagerness of domestic enterprises for offshore investment and financing. Due to the narrow channel permitting offshore Rmb to flow back to the Mainland, offshore Rmb transaction hub Hong Kong has an urgent need to have widened channels for the backflow of Rmb. On June 3 2011, the People's Bank of China (PBoC) promulgated the Circular on Clarification of Matters Relating to Cross-border Rmb Business (Yin Fa [2011] No.145) (关于明确跨境人民币业务相关问题的通知) (银发[2011]145号]) (Circular 145) to initiate the pilot RMB settlement programme for foreign direct investment and made clear that the RFDI includes investments for establishing new enterprises, merging domestic enterprises (other than reserve mergers), equity transfers and capital increases for current enterprises, and providing stockholder loans. Later, Vice Premier Li Keqiang, during his visit to Hong Kong in August, put forward Thirty-six Policies and Measures of the Central Committee to Facilitate the Economic and Social Development of Hong Kong (中央挺港三十六条政策) including “to extend the scope of pilot Rmb settlements for cross-border trade to nation-wide so as to facilitate the use of Rmb by more enterprises in the business and direct investments, and further strengthen Hong Kong's position as the Rmb settlement centre”.

In the context of the soaring market demand and the systematic arrangement by the governmental authorities, on October 12 the Ministry of Commerce (Mofcom) issued the Circular on Issues Relevant to Cross-border Direct Investment in Renminbi (Shang Zi Han [2011] No.889) (商务部关于跨境人民币直接投资有关问题的通知) (商资函[2011]第889号) (Notice 889). This notice, together with the PBoC's Measures for the Administration of Renminbi Settlement Matters Relating to Foreign Direct Investment (Announcement [2011] No.23 of the PBoC) (外商直接投资人民币结算业务管理办法) (中国人民银行公告[2011]第23号) (PBoC Measures) which was promulgated the next day, officially allows foreign investors to make direct investment in China using legally-obtained offshore Rmb capital. It also signals that China has formally opened the channel for RFDI on a nation-wide and cross-border basis.