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LEGAL: Recent Legal Developments in CNY Internationalization for Cross-border Trade and Investment Transactions
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alt Suffering from the depression of the world economy and the fluctuations of the exchange rates of certain major international currencies, both foreign and domestic investors have been calling for a more globalised Chinese Yuan (CNY), the official currency of China, in international trade and investment transactions. In response to such increasing demand, the Chinese government has been making efforts to realise the internationalisation of CNY through comprehensive and profound reform on a gradual basis, which consists of, including without limitation, reforms in cross-border trade settlement, foreign direct investment, and outbound direct investment. In this article, we would like to present readers with a quick look at recent Chinese legal developments in such CNY denominated cross-border trade and investment transactions.

1. CNY Settlement in Cross-border Trade

On 8 April, 2009, the Chinese government opened the gate to CNY settlement in cross-border trade, allowing a small number of selected enterprises in Shanghai and four cities in Guangdong Province (Guangzhou, Shenzhen, Zhuhai and Dongguan) (Onshore Pilot Areas) to trade with offshore enterprises in Hong Kong, Macau, and member states of the Association of Southeast Asian Nations (ASEAN) (Offshore Pilot Areas) in CNY instead of foreign currencies. On 1 July, 2009, a detailed regulation, Measures for the Administration of Pilot RMB Settlement in Cross-border Trade, was jointly issued by People’s Bank of China (PBOC), Ministry of Finance (MOF), Ministry of Commerce (MOFCOM), General Administration of Customs (GAC), State Administration of Taxation (SAT), and the China Banking Regulatory Commission (CBRC). On 3 July, 2009, PBOC further issued Detailed Rules for the Implementation of the Measures for Administration of Pilot RMB Settlement in Cross-border Trade. Until then, the basic legal framework for CNY settlement in cross-border trade had been established by the aforesaid measures. 
After the issuance of the 2009 Measures, CNY settlement in cross-border trade has been developing continuously, and in order to promote such transactions, certain restrictions have been relaxed by the Chinese government:

• Expansion of Onshore and Offshore Pilot Areas

The Onshore and Offshore Pilot Areas where CNY settlement in cross-border trade could be conducted were expanded twice. 
The first expansion took place on 17 June, 2010 according to Circular on Relevant Issues Concerning the Expansion of Pilot RMB Settlement in Cross-border Trade,  under which, Offshore Pilot Areas were expanded worldwide, and Onshore Pilot Areas included all the cities in Guangdong Province and an additional 18 provinces, including Tianjin. 
The second expansion occured on 1 August, 2011 according to Circular on Expanding the Regions Supporting RMB Settlement in Cross-border Trade,  under which, Onshore Pilot Areas were expanded nationwide.  

• Expansions of Scope of Pilot Enterprises

According to the 2009 Measures, only onshore enterprises recommended by the provincial level People’s Government,  within Onshore Pilot Areas, may conduct CNY settlement in cross-border trade transactions.
Upon the First Expansion, all onshore enterprises within Onshore Pilot Areas, with import and export qualifications, have been allowed to conduct CNY settlement for import trading. In addition, such enterprises have also been allowed to conduct CNY settlement in cross-border service transactions, and other transactions, under current account items. 
However, for CNY settlement in export trade, the mechanism for selection of Pilot Enterprises, for such participation, was maintained until 3 February, 2012. According to Circular on Relevant Issues Concerning the Administration on the Enterprises with RMB Settlement in Export Trade, all onshore enterprises, with import and export qualifications, would be allowed to conduct CNY settlement for export trades. Nevertheless, the six authorities required provinicial level People’s Governments to submit their respective list of enterprises which shall be monitored for CNY settlement in export trade, considering noncompliance of such enterprises during the last two years in terms of customs, finance, and taxes.. After joint examinations by the six authorities,  all onshore enterprises nationwide, with import and export qualifications, could conduct CNY settlement in export trade. 
As per the news published on the official website of PBOC on 12 June, 2012, a list with 9502 enterprises under the monitoring for CNY settlement in export trading has been issued. Therefore, the limitation on Pilot Enterprises participating in CNY settlement in export trade has been removed.
With all the above developments, currently, all onshore enterprises nationwide, with import and export qualifications, could conduct CNY settlement in cross-border trade and service transactions or other transactions under the current account items, with offshore enterprises worldwide.

alt2. Inbound Foreign Direct Investment in Offshore CNY


Inbound foreign direct investment in offshore CNY refers to direct investment made in China by offshore investors with legally obtained offshore CNY denomiated funds. Compared with CNY settlement in cross-border trade, FDI in offshore CNY is relatively new, which is officially established by Circular on Relevant Issues on Regulating the Operational Procedures of Cross-border RMB Capital Account Item Business issued by State Administration of Foreign Exchange on 7 April, 2011, Circular on Issues Concerning the Cross-border Direct Investment in RMB issued by MOFCOM on 12 October, 2011, and Measures on Administration of RMB Settlement in Foreign Direct Investment, issued by PBOC on 13 October ,2011. 
The main features of FDI in offshore CNY as set forth by the aforementioned regulations include without limitation, the following:

• Legitimate Sources of Offshore CNY 


The offshore CNY used in FDI shall be legitimate, which includes:
- CNY income obtained by offshore investors through CNY settlement of cross-border trade;
- CNY profits and CNY funds from share transfer, capital reduction, liquidation, and advance recovery of investments which are legally obtained by offshore investors from China and remitted out of China; and
- CNY funds legally obtained by offshore investors outside China, including but not limited to, the issuance of offshore CNY denominated bonds or stocks.

• Scope of Using Offshore CNY

FDI in offshore CNY shall not be made directly or indirectly in the investment of negotiable securities and financial derivatives with limited exceptions, nor be used for making entrusted loans, within China.
In addition, FDI in offshore CNY shall also comply with Chinese laws and regulations on FDI, e.g. Catalogue of Industries for Guiding Foreign Investment, issued by MOFCOM and National Development and Reform Commission, relevant national security regulations, and anti-monopoly regulations.

• Examination and Approval by MOFCOM or its Competent Counterpart

- Apart from the application documents required for FDI in foreign exchange, offshore investors shall submit to MOFCOM or its competent counterpart the following documents, i.e. supporting documents certifying the source of CNY funds, an explanation of the use of CNY funds, and a completed standard governmental form on cross-border direct investment in CNY.
- If the FDI in offshore CNY falls under any of the circumstances below, the provincial level counterpart of MOFCOM shall submit a review request to MOFCOM.  Only after such review is satisfactory to MOFCOM, the local counterpart of MOFCOM may issue an approval letter and certificate of approval for such FDI in CNY:
 Investment of CNY funds of CNY 300 million or more;
 Investment in industries such as finance guarantees, finance leasing, microfinance, or auctions, etc.;
 Investment in foreign-funded investment companies, foreign invested venture capital enterprises, or foreign invested equity investment enterprises; or
 Investment in industries under the macroeconomic control of the state, e.g. cement, iron and steel, electrolytic aluminum, and shipbuilding, etc.

3. Go Abroad Strategy: Outbound Direct Investment in Onshore CNY

Outbound direct investment (ODI) refers to the establishment of a new offshore non-financial enterprise, or obtaining  ownership, control, or business management rights, of an existing offshore non-financial enterprise through new establishment or merger and acquisition by enterprises legally established in China. 
On 6 January, 2011, PBOC issued the Measures on the Administration for Pilot RMB Settlement in Outbound Direct Investment, allowing onshore non-financial enterprises  to make ODI in onshore CNY. The onshore investor shall obtain approval from the authorities of ODI, and when going through  approval formalities, the anticipated amount of ODI in onshore CNY shall be specified.
The main features of ODI in onshore CNY as set forth by the aforementioned measures include without limitation the following:

• Outward Remittance of CNY Funds for ODI

For remittance of upfront fees for ODI, or ODI without remitting upfront fees, the onshore investor shall apply  for an upfront fee remittance or ODI registration. Upon completion of such procedure, the onshore investor may go to the bank to conduct the remittance of CNY funds for ODI or remittance of upfront fees in CNY. In principle, the accumulative upfront fees remitted by an Onshore Investor shall not exceed 15% of the total Chinese investment.  If the upfront fees exceed the threshold of 15%, the onshore investor shall explain the situation and submit relevant supporting documents to the local counterpart of SAFE. 

alt• Inward Remittance of CNY Funds for ODI

The onshore investor may have its profits gained through ODI returned to China in CNY. The bank may, after verifying the supporting documents such as the resolution on profit disposal issued by the board of directors of the offshore company, etc., enter such return of ODI profits in CNY into the account of the onshore investor.
The onshore investor may also, for the CNY income derived from capital reduction, liquidation, etc. of its offshore company, go to the bank for a receipt of such income in CNY with relevant approval documents issued by authorities.
The issuances of the aforementioned regulations by the Chinese government in recent years represent significant steps in the process of CNY internationalisation, and have offered both onshore enterprises and offshore investors an import currency alternative for cross-border trade settlement, inbound, and outbound investment. It is recommended for those enterprises and investors who are interested in CNY denominated transactions to pay close attention to the further development of the Chinese legal framework of CNY internationalisation and the implementation thereof.  

by Manuel Torres (Parter) and Jessica Cao (Associate) of Garrigues Shanghai
Garrigues has over 13 years of experience in advising companies in their investments in China. The team of experienced Western and Chinese professionals at Garrigues Shanghai provides legal advice to foreign companies on a wide range of issues such as incorporation of companies and negotiation of joint ventures, commercial contracting, M&A, tax, real estate, employment, intellectual property, arbitration and infrastructures, as well as to Chinese companies with investments abroad.
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