On June 14, 2012, the People's Bank of China (the "PBOC") published the Circular on Clarifying the Operational Rules of RMB Account Settlement for Foreign Direct Investment (Yin Fa [2012] No. 165) (the "Circular"). The aim of the Circular is to regulate and provide local counterparts of the PBOC and commercial banks with detailed guidelines on their account settlement procedures for the RMB equity investment of foreign investors in China.

1. The Circular sets out the requirements for opening various RMB accounts for both the banks and the account holders where foreign direct investment or acquisition of Chinese companies will be made in RMB by a foreign investor. For example:

a) A foreign investor is only allowed to open one RMB upfront expense account before the establishment of a foreign invested enterprise (the "FIE"). Such account shall be filed with the RMB Cross-border Collection and Payment Information Administration System of the PBOC (the "RMB Information System") by the bank. However, before opening the account, the bank is obliged to check the RMB Information System as to whether an investor has already opened a RMB upfront expense account.

b) For each M&A project in which a Chinese shareholder sells its shares to a foreign investor, the Chinese seller can only open one specific account to receive the RMB purchase amount from the foreign buyer on the basis of the approval letter issued by the competent examination and approval authority regarding the acquisition.

2. Apart from detailed requirements on opening RMB accounts, the Circular also provides rules regarding taking out RMB loans from abroad, use of RMB funds in the capital account and foreign debt account, etc.

a) An FIE can only take out a RMB loan from abroad if its registered capital has been duly contributed in accordance with the approved contribution schedule. However, a foreign invested real estate enterprise is not allowed to take out any RMB loan from abroad. Both RMB and foreign exchange loans from abroad are subject to the foreign debt quota of the FIE, i.e. the balance between its registered capital and total amount of investment. If such quota is denominated in foreign currency, the applicable exchange rate between RMB and the concerned foreign currency shall be the intermediate rate published by the PBOC on the date on which the RMB loan contract becomes effective.

b) The RMB funds in the capital account and the foreign debt account of an FIE can only be used for activities within its approved business scope, but cannot be used for investment on negotiable securities and financial derivatives, entrustment loans, purchase of financing products and non-self used real estate. Except for foreign invested holding companies, the RMB funds in question cannot be used for equity investment in China either.

c) However, the RMB funds in the capital account and the foreign debt account of an FIE can be used for repayment of its loans from domestic and foreign lenders.

The Circular sheds new light on the rules regarding opening various RMB accounts for the purpose of RMB equity investment by foreign investors in China. The Circular also encourages the local counterparts of the PBOC in China and the commercial banks in China to report problems they have encountered in the course of implementing the Circular for further improvement of the relevant provisions by the PBOC in the future.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

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The original publication date for this article was 30/07/2012.