By King & Wood’s Banking Group

Since the launch of the pilot program of RMB settlement in cross-border trade transactions in July 2009, the volume and complexity of the said transactions and the ancillary banking businesses have been rapidly increasing. During the past two years, the pilot program was carried out in 20 provincial regions. PBOC plans to expand the pilot program to the whole country within this year. In order to satisfy business and banking industry’s strong needs for policy transparency, regulatory authorities such as SAFE and MOFCOM have issued various rules and guidelines aiming to streamline cross-border flows of RMB. On June 8, 2011, PBOC published a most recent circular (1)("Circular") which clarifies several major issues relating to cross-border RMB transactions. Industry feedback regarding the Circular has been positive and the Circular has been interpreted as "a significant step towards the internationalization of RMB" by the market.

We highlight the key points of the Circular worth noting as follows:

  • RMB Trade Indebtedness: Payment obligations owed by PRC residents to offshore counterparties under cross-border RMB trade transactions, including without limitation the issue of RMB usance L/C, offshore advance payment and deferral payment and other forms of trade indebtedness would not be deemed as foreign debts.  This will make it easier to create a free-flowing channel of RMB funds between the onshore and offshore capital markets.
  • RMB Guarantee or L/C issued by onshore banks in favor of offshore entities would not fall within the regime of foreign security/guarantee.  It would relieve onshore banks from the foreign security quota concerns.  More opportunities may be explored where the offshore entities are willing to accept RMB guarantee or RMB L/C to back offshore lending.  The RMB guarantee or L/C, if structured properly (mainly using RMB guarantee/L/C as a vehicle for offshore lenders to gain a pari passu position with onshore lenders), may resolve the traditional pitfall embedded in the onshore/offshore structure where offshore lender cannot get access to onshore collateral.
  • RMB FDI: The Circular emphasizes that so far the RMB FDI transactions is still at its pilot stage and should be subject to PBOC head office approval on a case-by-case basis, primarily for prevention of hot-money inflows. However, it does provide a detailed step-by-step process on how to obtain PBOC’s approval. According to the process, foreign investors or WFOEs shall ask their settlement banks in China to submit the RMB FDI applications to particular PBOC offices together with pre-obtained MOFCOM approvals for the same transaction.  Complete applications will be handed over to PBOC head office for final approval. This approval requirement applies to greenfield projects, M&As of onshore enterprises (excluding round-trip investments), equity transfer and shareholder loans.  At this moment PBOC does not accept applications for transactions falling within the "restricted" category or under policy control (presumably this refers to financial and real estate sector).  Although it remains yet to be seen how in practice SAFE and MOFCOM will react to the PBOC requirement, it is likely that onshore banks will be keen to follow the PBOC requirement, thus making it a requirement for banks’ client to comply with.
  • Genuine Trade Review: PBOC requires onshore to verify whether there are genuine transactions behind RMB settlement request from customers.  Onshore settlement banks as well as offshore participation banks are generally not allowed to provide RMB settlement services if the applicant is pursuing arbitrage (such as RMB-NDF contracts) without any genuine RMB cross-border trade background. Moreover, onshore settlement banks are kept from providing RMB settlement services to onshore importers under the situation where the onshore importers intend to do currency conversions outside mainland China and settle the transaction with offshore exporters.

For you ease of reference, we summarize in the appendix a matrix which identifies the relevant regulatory authorities for various types of RMB cross-order capital-account transactions and regulatory authorities’ discretions on specific businesses.


For further information on the matters covered in this newsletter, please contact:

Beijing Office

Wang Ling
King & Wood
40th Floor Office Tower A, Beijing Fortune Plaza
7 Dongsanhuan Zhonglu
Chaoyang District Beijing
Tel: +86 10 5878 5056
Fax: +86 10 5878 5599

Shanghai Office

Roy Zhang / Zhong Xin
King & Wood
16-18/F, One ICC, Shanghai ICC
999 Huai Hai Road (M), Shanghai
Tel: +86 21 2412 6053 / 6055
Fax: +86 21 2412 6250



(1) The PBOC Circular on Clarifying Relevant Issues of Cross-border RMB Transactions (《中国人民银行关于明确跨境人民币业务相关问题的通知(银发[2011]145号》).