By King & Wood’s Foreign Investment Group

On October 12, 2011, the Ministry of Commerce (MOFCOM) promulgated the Circular on Issues Relating to RMB Cross Border Direct Investment dated (the "Circular"). The Circular provides that outbound investors (including investors of Hong Kong, Macao and Taiwan) can make direct investment with RMB funds they obtained legally outbound (the "Offshore RMB").

1. Scope of Offshore RMB

The Offshore RMB mainly includes (1) RMB legally acquired by foreign investors through settlement of international trade; (2) RMB remitted outbound which acquired through  profit distribution, equity transfer, reduction of registered capital, liquidation or early return of investment in mainland China and (3) RMB legally acquired or raised through issuing RMB bonds or stocks outbound and other legal channels.

2. The Industries the Offshore RMB Can Be Invested in

The Circular provides that Offshore RMB investment shall comply with foreign direct investment rules in China, and it also provides some exceptions for Outbound RMB investment, such as the securities or financial derivatives in mainland China. In addition, the Outbound RMB can not be invested in entrustment (inter-company) loans.

3. Investment Approval Procedure

Generally, the approval authorities are unchanged. The commerce departments at all levels are responsible for examination and approval of offshore RMB direct investment review. The provincial authorities must submit with MOFCOM for review before approving of investment under the circumstances that: (1)investment amounts to RMB300 million Yuan or above or investment  in financing guarantees; (2) investment in foreign invested investment companies ; and (3) investment in sectors that are subject to macro-economic control of the State, such as sectors as cement, steel and iron. MOFCOM will gradually simplify the procedures concerned based on the practice of cross-border RMB direct investment.

It can be inferred that Offshore RMB can be used to invest in a foreign invested investment company (e.g. a PE firm) in China.  However, in addition to the usual approval procedures for all foreign investments, it is also subject to MOFCOM approval (as described above). The prolonged approval procedure may cause more uncertainties.