China lays groundwork for offshore RMB funds

The Chinese government has released a circular on RMB cross-border foreign direct investment, in effect providing RMB funds raised offshore a clearer path into mainland investment opportunities.

Chinese regulators have cleared a more certain path for offshore RMB investors hoping to channel their capital back into mainland China in the form of foreign direct investments (FDI).

Much of the market focus has been on the differences between onshore RMB funds and offshore USD funds – but a third contender for attention will be offshore RMB funds now that a formal process for their use has been put in place, according to Ying White, a partner at law firm Akin Gump Strauss Hauer & Feld.

Last month the Chinese Ministry of Commerce (MOFCOM) released a circular detailing what types of RMB capital raised outside of China fund sponsors can use for FDI; including cross-border trade settlements, equity transfers and RMB-denominated profits that have been remitted offshore, according to a client memo from law firm Mayer Brown. The Circular also widens the scope of investments offshore RMB funds are permitted to target.

However, offshore RMB funds will be prohibited from investing in certain stocks, derivatives, and loan arrangements, according to legal sources. The restrictions are intended to prevent speculation into overheating Chinese markets, they suggested.

Under the rules offshore RMB funds will still be subject to the same regime all foreign fund FDIs fall under. The upshot is the circular transforms FDI approval applications from a case-by-case basis into a more formal regime that provides offshore investors greater certainties.

Local branches of MOFCOM can now approve certain investment applications in accordance with the Circular, however applications for investments in certain industries or which go above RMB300 million ($47 million; €34 million) must still be approved by central regulators.

The move is seen by many analysts as a way of further internationalising the RMB, long an objective of the Chinese government. Some RMB500 billion was used in cross-border settlements between a Chinese company and foreign business in 2010, according to Chinese government statistics. A more freely convertible RMB currency will thus benefit non-Chinese businesses who have accumulated large pots of RMB capital they could not easily spend or invest.