8 Sept 2011
Hong Kong: No.1 Place for Offshore RMB Investments
Following a draft notice by the Ministry of Commerce (MOFCOM) on August 22nd and announcements by Incoming Premier Li Keqiang during his visit to Hong Kong in the same month, a regulated process for using funds from offshore RMB accounts for foreign direct investments (FDI) into mainland China is expected to be in place by the end of 2011 for HK companies. This move follows similar regulations issued by the People’s Bank of China (PBOC) on June 3rd.
Currently, RMB inflow is regulated on a case-by-case basis, with approval required by MOFCOM and the PBOC at the ministerial level. According to the new draft plans, RMB funds can now be used for pay-in and increase of registered capital, as well as shareholder loans to subsidiary WFOEs in China, in addition to the purchase of shares and assets of Chinese companies. RMB funds for investment have to be obtained “legitimately”, i.e. through transactions such as cross-border trade settlements, offshore RMB-denominated bond issuances or stock sales. They cannot be used, however, to issue entrusted loans or to repay bank loans.
Chinese regulations on mergers and acquisitions, anti-monopoly provisions and restrictions as specified in the Foreign Investment Guidance Catalogue still apply. To prevent the inflow of speculative “hot money”, offshore RMB investment in certain sectors such as real estate, domestic securities and financial derivatives are not permitted.
For the RMB-offshore FDI scheme to become effective, MOFCOM still has to release the final regulations, which is expected as early as September 2011. In addition, implementation rules on the local level defining the interaction between MOCFOM and PBOC, as well as offshore banks and financial regulators, will need to be formulated. As the Hong Kong Monetary Authority disclosed recently, the negotiations on these issues are expected to be finished before the end of this year.
This development marks a further step in the internationalisation of the RMB. It will also increase the attractiveness of Hong Kong as the financial centre for foreign companies; they can use RMB for both the settlement of transactions and for their investments into China.