In the midst of its rapid economic development, the People’s Republic of China (PRC), the second largest economy and the largest trading nation in the world, has finally determined to change its domestic currency market, which used to be pretty much closed to foreign investors over a long period of time and accordingly, promulgated a series of laws and regulations to ease the previously tight foreign exchange (FX) control in the mainland. These laws and regulations were put in place to propel the internationalisation of Chinese Renminbi (RMB) by expanding the use of RMB under both current and capital accounts for the purpose of ultimately achieving an international status for the RMB matching the economic status of the PRC in the global economy. This chapter endeavours to outline a legislative landscape of RMB internationalisation from the following main aspects:
Trade settlement in RMB
In July 2009, the PRC government launched a small pilot program of RMB settlement to allow pilot enterprises in pilot areas to settle their cross-border import/export trades in RMB with qualified domestic settlement banks.
Thereafter, the relevant authorities gradually expanded the scope and variety of RMB cross-border settlement by means of enlarging the coverage of pilot areas and pilot enterprises, and adopting a series of measures to loosen regulatory controls over cross-border current account items. At present, all enterprises in the PRC with export and import qualifications are permitted to settle their cross-border trades in goods, services and others under the current account items denominated in RMB, regardless of the location of the contract counterparties.
Under the current regulatory regime, the central bank of the PRC, People’s Bank of China (PBOC) supervises the overall implementation of RMB cross-border settlement together with other regulators. Furthermore, the domestic settlement banks are required to carefully review and determine the genuineness of the transactions behind the RMB settlement and the consistency between the RMB receipts/payments and flow of goods or services, similar to the requirements under the FX administration.
The most direct and immediate result of complete liberalisation of the current account for trade settlement in RMB is the overseas accumulation of RMB. To develop RMB backflow channels, the PRC government promulgated the regulations governing the use of RMB for foreign direct investment (FDI) in October 2011, according to which foreign investors may conduct FDI in the PRC with the offshore RMB obtained from their cross-border trade, existing FDI and other legal channels including the issuance of RMB bonds or shares overseas.
Though such RMB FDI is subject to the further provisions of the industrial policies on foreign investments, security examination on the M&A by foreign investors and anti-monopoly review in the PRC, it effectively facilitates the use of capital without requiring FX settlement verification by the State Administration of Foreign Exchange (SAFE). Notwithstanding the above, the regulatory regime requires that such RMB capital shall not be used for investment in securities and financial derivatives, provision of entrustment loans and purchase of financial products or estates not for private use.
RMB foreign loans
Aside from capital injection, the current PRC regulatory regime provides another channel through which foreign investors or financial institutions may lend RMB cross-border loans to PRC enterprises including domestic enterprises and foreign investment enterprises (FIEs).
However, restrictions for domestic enterprises to borrow RMB foreign loans are stringent, making such practice relatively uncommon in the market. In spite of the foregoing, a pilot program has been carried out in the Qianhai region of Shenzhen City in southern China’s Guangdong Province, which modestly loosens such restrictions on RMB foreign loans for domestic enterprises registered and operating in Qianhai.
FIEs, on the other hand, are allowed to borrow RMB foreign loans at their own discretion within their borrowing gaps, which are generally equal to their total investments minus their registered capital, though special limits apply to finance leasing FIEs and holding FIEs. After entering into a loan agreement, the RMB foreign loan shall be registered with SAFE following the same procedure as that of a FX foreign loan. However, in the local practice of some PRC cities, such registration is not required depending on the coordination between local PBOC and SAFE.
When receiving and using RMB foreign loan proceeds, the onshore borrower shall apply to open a general RMB deposit account with an onshore qualified account bank which may examine the authenticity and compliance of the use of such loan proceeds. The same as the RMB FDI, the FX settlement verification by SAFE is not required for the usage of such proceeds.
RMB ODI and RMB outbound loan
In order to realise the RMB’s function as a medium of exchange, the PRC government has established a regulatory regime for overseas direct investment (ODI) in RMB. After obtaining the approval of National Development and Reform Commission (NDRC) and the Ministry of Commerce of the PRC (MOFCOM) and completing the SAFE registration for RMB ODI, PRC enterprises (excluding financial institutions) are allowed to use onshore RMB capital to establish enterprises or acquire ownership, control or operation right of enterprises or projects overseas.
After completing the RMB ODI, a PRC enterprise may choose to lend RMB loans to its offshore subsidiaries within its outbound lending quota approved by SAFE.
Furthermore, a pilot policy launched by PBOC at the end of 2012 offered new channels for a foreign multinational company (with member companies both inside and outside of the PRC which are ultimately controlled by an offshore parent company) to do RMB outbound lending. According to such policy, the onshore member companies registered in Shanghai and Beijing are allowed to lend RMB loans to the offshore member companies and the offshore parent company, subject to an annual quota approved by PBOC. This pilot policy presents new opportunities for foreign multinational companies in the PRC to mobilise their RMB cash globally.